Everybody.
Green.
Working? All right. Morning, everyone. I'm Jim King with The Scotts Miracle-Gro Company, welcome to our Analyst Day meeting here in Boca. Yeah, I'm getting the Fisher now. We're going to have, I think, a really robust two-hour discussion here about the business. Let me just help everybody set expectations on what we're going to do this morning, and then how the day will proceed. We're going to start in a few minutes with an overview of the business from Jim Hagedorn, Randy Coleman, and Mike Lukemire. Kind of a soft touch on the update on the strategy. Wouldn't expect anything big coming out of this. Sorry to disappoint, but apparently CNBC had a story Friday night saying that we were going to have big news coming out of this, and we're going to announce a spin-off. That ain't happening.
Did they?
They did.
Oh.
That's not happening, but if you're listening to CNBC, you can listen or you can hang up. It's up to you.
Maybe they thought we were spinning him off.
Exactly. That's not happening. Light touch on an update on the strategy that we outlined for all of you last year that we call Project Focus. From there, we're going to turn really the rest of the day over to the sales and marketing folks at the company. You're going to hear a little bit from Emily Winters about Store of the Future. We're going to talk about what we're doing in the live goods business. If you recall our Analyst Day meeting a year ago, we talked about our first investment into that space and a partnership with Bonnie Plants. Really good progress there, you'll see more and hear more about that. Discussion about our lawns business and what we're doing with technology. Again, last year, we talked to you about something called a Connected Yard.
You'll hear an update on the progress that we've made there. Towards the end of the morning, we'll talk about our controls business in that segment as well. Some new products coming out of our controls business based on the new Roundup agreement that we amended a year and a half ago, some news there. We're going to spend some time talking about our hydroponics business, which I know is a big subject of interest for all of you. From there, we're going to leave here, and we're going to get on three buses just outside the door here to go on store walks. We'll do that for approximately two hours, come back here, and then do Q&A after the fact back here. Folks who are listening in on the webcast, we're going to stay live until roughly 10:00.
We'll shut down until probably around 12:30 P.M., when we start the Q&A session. Obviously, we're going to talk about forward-looking things today, here's the legal disclaimer, we'd ask people to familiarize themselves with the risk factors. Other than that, I'm going to get out of the way and let Jim and Mike and Randy take over. Thanks.
All right. Good morning, everybody. I think, I hope we'll do a good job.
I believe.
What I told people yesterday when we were down here kind of getting our stuff together was we've got a great company. We've got a good strategy. We're executing against that strategy. Everything's going well. If you take anything away from this, it's a quiet confidence is kind of what you need. Don't scare civilians. That would be sort of my advice to them. I don't think we're going to do that. These two are my sort of most closest operating partners. Randy counts the money, Mike runs the business, I would say a lot of what we do, besides sort of the public work like this, is Randy and I sort of figure out how we want to capitalize the business and how we want to allocate capital so Mike can grow and execute. These are my partners in crime.
I have a super easy intro here because it's really just to kind of tell you what I already told you, which is we're doing what we said, and we're on track, everything's going fine. If you take anything away, that's what I would say. I do want to just talk a little bit about how I'm going to operate today, just so that people's expectations are set. My wife had both hips replaced last week, and I thought I could get out of I would've thought I'd be more independent, or she would be more independent quicker than she was. I'm going to be down with you. Yesterday was a little bit like a vacation to get away because I would say to everybody who's been a caregiver, it's hard work. Let me tell you. I know she would do the same for me.
Today I'm feeling a little more guilty than I was yesterday because yesterday, I'm going to do store walks, and then I think I'm just going to head back to New York and go be with her, because she's with sort of temporary nurse staff that keeps swirling in and out. I'm like a common. If you guys don't mind, if you have any particular questions, either we'll take them up here. We got to run a few minutes late getting out of here for me. The rest of the team is more than capable of covering. I will be on the retail stores, so we can hook up on the walk. I think we're all in a big herd, so I'll try to make sure I get to visit.
If people want to visit with me, all you got to do is say so. Okay? I also want to say, we're really lucky here in that we have, I think, over half the equity is represented in this room right now. Again, thank you guys so much for trusting us with your money. My older sister, Susan, who chairs our unlimited partnership, so she is the biggest shareholder of the company, is here. My twin sister, Kate, who's a board member, is here. I got Adam Hanft, who's a board member, who's here. Every time I give these sort of. I usually use a lot of foul language, and a lot of times it shows up in a board meeting. Somebody says, "Did you know when he met with the investors, he said 'fuck' like 20 times?" Don't be counting, Adam.
Let's just talk about what we kind of said we were going to talk about, which is this is our plan. Start with we have a fabulous business. Okay? I'm going to jump forward and make a slide kind of irrelevant later, which is we over-produced last year, and so far the business is great. Okay? The core business in Q1, I think Mike reported, we were in a staff meeting before we reported numbers, and he said. I think it's the first time we've had every single one of our business units is over producing. This is Q1. Okay? Going back to the everything is on track, I think that Mike and his entire sort of sales and execution team, who's run by Mike Carbonara over there.
There's a lot of confidence that the retailers are being set well, that our early season sort of southern business is doing well. I would just say so far so good. Focused on the core. I think we've made a ton of progress. I think I probably have had a reputation of a little bit eating my young when it comes to my chief operators. Mike is the best operator I've ever had working for me. If you look at what Mike has done with the business. Remember, Mike is a manufacturing guy. That's where he started at Scotts and built his bones. He got in a little trouble with me. I sent him down to run a sales region. From getting in trouble with me to being my main operating partner is a result of engagement with the business.
He took over the southern region. It's based in Palm. He went out and visited every single salesperson. He talked to people and said, "What do you need?" We gave him the entire country. We gave him all of our BBTs, which are our retailer offices. He was running everything. North America, then runs our global business. Mike is one of those guys where, first of all, when I talk to Mike and say, "I'm thinking this would be a good idea," and we mostly agree on the stuff because I think he's a good partner to have. We don't disagree a tremendous amount. A little bit sometimes. He's like, "I like that. Let's go do it." Then he does it. It's a really great execution partner for me to have.
When you say focus on the core and you say, are there a lot of things you guys could do to improve your core business, I think Mike's going to talk about some of this stuff. The answer is hell yes, there is. There's more room to improve the business. Mike is one of these guys, I'm going to say Mike's entire team and my team are working together really well. It all starts with run our core like it matters, don't get all crazed about sort of Hydro or Tomcat or whatever the hell else we're playing. The next part of this is reconfigure the portfolio. All I'm doing is repeating the strategy. We talk about this a lot, I think we talk about this to you guys a lot. I like it because it's not changing. Okay?
Reconfigure the portfolio. First we had, this was a couple of years ago. I sat down with the team and said, "If we could be anything we want, would we be who we are? Europe, lawn service." I think we said probably not. I said, "What's stopping us from being, what would we be?" We're headed in that direction, I don't really need to define that much. I said, "What's stopping us?" We spent probably a good six months saying, what would we want to be? It's really very much focusing on America. Hydro sort of live goods with rodenticide. It's not a crazy one. It's exactly what we've been saying. We said we would do that, we would reconfigure the portfolio effectively. We all started to believe. Presented to the board.
This is like coming up on two years ago. The board like, "I love that." We did it. Basically it's lawn service out, probably Europe out, I don't think we have anything to really add on that except to say we're making progress. Okay? I would say thumbs up there. Bonnie in, a kind of unique deal with Bonnie where they wanted a 50/50 deal. Just 50/50. We're not the easiest people to get along with all the time, 50/50 sounds like, how do you break ties? It could become dysfunctional. They didn't want to do 51. I didn't really want to do 50/50. Randy said, "I think we just do 25% of that company. Why not? We can block as long as we have a right to buy up," which we do.
We got that deal done. We got Tomcat done. There's probably more deals that we haven't Hydro in, really craft in, which was creation of Hawthorne. We'll talk about that more, but splitting up Hawthorne really to allow Chris and his business in N.Y. to focus on Hydro and Sutter, where Sutter is, to sort of take the craft side, which is a lot of stuff sold in our existing channels. That's effectively the reconfiguration. I think I'm going to bring up something which I know we kind of prepped for, which is, when are you done with that? I thought you said by now you'd be done. It's true. We said that. I think here's what we think. That lest the feds like actually becoming active on enforcement on cannabis on a federal level, that we like the type of space.
In a lot of ways, it's an unregulated business, meaning that if you want to see how a business can operate in a kind of pure entrepreneurial way with young people who are really good at what they do and are making tons of money in a high growth, high margin business, look at that business. I defy someone to say, whether you agree with it or not, that if you want to see a business that's old school, where you say, what's the negatives of regulation and just people like all the stuff we do every day. When it doesn't exist, it allows a super happy sort of entrepreneurial high growth. Why not? Let's just do it.
In a lot of ways, it's an unregulated business, meaning that if you want to see how a business can operate in a kind of pure entrepreneurial way with young people who are really good at what they do and are making tons of money in a high growth, high margin business, look at that business. I defy someone to say, whether you agree with it or not, that if you want to see a business that's old school, where you say, what's the negatives of regulation and just people like all the stuff we do every day. When it doesn't exist, it allows a super happy sort of entrepreneurial high growth. Why not? Let's just do it.
I think part of what's interesting about this company, if I were you, and listen, we are investors, so I do feel this way, is the thing about focus on the core reconfigure, was we just said to ourselves, "Who's stopping us? Why don't we just do what we want?" Got the board to agree, I think the reaction with the street has been very positive to this kind of reconfiguration. Why haven't we shut the door? Look, we have some small deals that are in the works that I think were absolutely consistent with our original guidance that we'd be pretty much done by now. Some of those deals are just a little slower because we're dealing with families, and they have their own particular sort of situation. This is, I would put in the small beer category.
There are some highly strategic moves we could make in the space that we're just working our way through right now. That's the only reason that we said we're not sure if we're done or not and closing our acquisition book. Then sort of phase three here is move into where we have been in the past, which is shareholder friendly. My view is subject to the stock being affordable, and I don't know exactly what that means. I trust my finance partner and our external advisers for that, is I think the best company we could buy is us. I like our company a lot. I think a way of returning cash to our shareholders with a bias toward repurchasing shares is the most important thing that I want to do.
I am not interested in sort of saying, "Oh, just leave the book open. Why put a line in the sand?" Which a lot of our the analyst community said, "Why not just shut up about the windows open for acquisitions?" It's mostly because I want to close that chapter and move into the reduce our share count. If I can't do that because the share price is happily too high, we'll do a dividend. That is our plan, and it's not changing. My resistance to it is that I think that Mike and I, this is why Randy's so important. Mike and I will buy it toward growth. Okay? We like to acquire, because acquiring shit is fun. Okay? Particularly in the Hydro space, it's fun. I don't want to stay in fun.
The hardest part of what we're doing, which is why we put that new incentive plan in is because we're going to go into a period of somewhere between 5 and 10 years, where it's absolutely about cash flow generation, it is absolutely about returning that cash to our shareholders through either repurchases or dividends. That's the part that's the hard part. It's just running our existing business part. We're going to do that. That is my reluctance to say, "Oh, you guys, why don't you just stop talking about shutting the acquisition window and just do what you're going to do? If it's a good deal, go ahead and buy it." Well, because the problem is Mike and I will find plenty of good deals, and we'll spend all our money doing that.
It might be a great idea, but I think we like the strategy, okay? We're sticking with it. We have a strategic opportunity that we're looking at, and we haven't made an internal decision on. We haven't gotten board approval for it. That's the only reason to keep it open, and that probably would take us another six months or so. Okay? That's really all we got working on. You keep pushing a button like you want.
I am.
The results have been good. Okay? I don't need to say any more than that. Okay? Share price is happy. Q1 good. Far so good. I think I'm done now.
Thank you.
That's my contribution today, I think.
You're either four minutes ahead, or I have four minutes left.
Whatever.
I'm going to talk about, in conjunction with what Jim was saying, the next phase of Project Focus. Thinking about cash flow, whether we're talking about generating cash or using cash, both aspects of that are an important part of the Project Focus. On to the next slide. Here, I think this is a really helpful graph that shows over time what our operating cash flow and our free cash flow looks like. You can see CapEx is pretty consistent year after year after year, and you can see that big dip in 2011 and 2012. For the people that have been with us, over time, you probably remember that period. For the people less familiar, what really happened at that point, 2011, we had big growth expectations. We built a lot of inventory. The year didn't come together after a record 2009 and 2010.
2012, we said we're going to run the same play, do it again, get the same results. It's at that point, that summer of 2012, remember we sat down as a management team of Vermont and said, "All right. We're going to have to run the business a little bit differently here." We've done that. I'm glad to say 2013, 2014, 2015, 2016, and I feel really good about 2017. We've hit our earnings numbers year after year after year. You look at the cash flow numbers, and you look at 2005 on the far left end and 2016, we've essentially made no progress on annual basis on cash flow. Great earnings growth.
I think we've developed a lot as a company to move from almost exclusively on the top line where earnings was a benefit to let's keep that in balance, look at earnings too. The next frontier for this company is really about cash flow and keeping all that in balance. One reason why this is a little different than what you might see from our non-GAAP EPS numbers over time is we have taken significant restructurings over a period of time that we exclude for non-GAAP EPS. When you're looking at cash flows, everything counts. Again, I think that's one thing as a shareholder looking forward, everything is going to count. I think that's an important check on us. As far as what we're going to do differently, I think maintaining growth.
I think we have, again, a great track record over the last four years and feeling good about this year as well. That's first and foremost, the most important thing to cash flow. 80%-90% is essentially earnings growth. Broaden decision-making processes. I'm glad to say my partner here, Mike Lukemire, he's really changed the culture in the last two or three years. Two or three years ago, I don't think we would've been able to think about cash flow as an organization because we were still very siloed in our thinking and how we operated. Now we truly operate as one team in an operating sense, and it really just makes that collaboration much easier to actually think about running our business differently. Then incentives. I think what gets measured gets done.
An important change to our incentive plans is for 2017, for the short-term plan, the one-year plan, 25% of that now is based on a cash flow metric. We haven't had that in place for several years. We introduced that just as a 25% of the total pie just to get people starting to think about this. Our long-term five-year plan is 66%, or two-thirds of the metrics for the payout on that plan. Very biased towards cash flow in the long run. This first year, we're just introducing that. Again, we're trying to put our money where our mouth is. Then supply chain. Again, 80%-90% is really earnings based. That last 10%-20%, a lot of that is based on how we run our supply chain. That's what the next few pages go through. Our vision here, modernization.
Our retailers have changed over the last 15 years. We've changed a little bit, but we know we need to accelerate that change and work with them collaboratively to essentially rebuild our supply chain in a way that's more efficient for the entire value chain, from us to them. We're doing that. Changing the paradigm, thinking about cash flow, that's really important. Optimizing the way we run our facilities. Mike hired a gentleman about six months ago who's had a big impact on just how we think about filling up our plants and how we utilize our assets. We're seeing a lot of benefit from that. Then inventory and distribution, again, working with our retailers collaboratively to take inventory out of the overall system. We put numbers on the bottom of the page here. It says year-end cash flow improvement.
That's really a proxy for working capital improvement, separate from the earnings benefit we'll see during the year. $30 million is the number we've put on 2017, and $65 million-plus over four years. Even as the CFO, I think these are really conservative numbers, and I think you'll see in 2017 that'll be a really nice down payment on what we're going to see over time. Very achievable numbers on this slide. As far as inventory and asset efficiency, one thing that we've typically done is we introduce new products as we do. We're aggressive, we have big expectations, on occasion, we've built too much inventory when we launch something new. We're getting a little bit more precise with our planning and our expectations as you see. Things are going well.
We have the capacity to catch up and build more inventory. We're being a little more prudent in how we're doing that. That's one change. Another thing we did, we invested in new systems a couple of years ago. We're just starting to see the benefit of that now. We could plan better and wring some of that inventory out of the system. From a safety stock point of view, this isn't necessarily revolutionary. We don't treat every SKU the same. Our big power SKUs, Weed & Feed, for example, high volume, high margin, we want to make sure we don't run to that. That's definitely an A SKU.
Some of our smaller SKUs with lower volume, lower margins. Again, we have the capacity to catch up if need be. We're being a little more thoughtful in how we build inventory. All this comes together as far as inventory and asset efficiency. As far as manufacturing, we made a change from who's running this initiative at this point. I think that's helped a lot. The other thing we're doing a little bit differently is historically, especially around growing media, we've made a lot of CapEx investments in building out our supply chain network to make sure that we have an appropriate footprint. Now we have over 40 plants across North America. It really helps with serving our retailers. It really minimizes the freight cost. It's a very freight-dependent business, both on bringing inventory into a growing media facility and then shipping back out.
One thing we're doing now is looking across the entire continent and saying there's probably places where we can use co-packers to fill in some of those blanks that'll minimize some of our freight costs from facility to facility and also minimize our CapEx, because if you go back to how we're going to measure free cash flow going forward, stop bringing cash flow, less CapEx. Build some tension into the system. That's intentional. As far as payment terms and cash flow, I'm really encouraged by the progress our purchasing team has made so far right out of the gate. Typically, when we talk to vendors, it's very much negotiation about trying to find the lowest price. Most of the time, that makes sense.
Sometimes, depending on the circumstances and the particular vendor, it may make sense to talk more about terms and take a more balanced perspective on how we negotiate with certain vendors. We're doing that now. Really, it's been quite a shift in the way we think about things. Distribution inventory. Again, 15 years ago, the home centers didn't have the level of maturity in their supply chains that they have today. What we've done is essentially sit down with the retailers and say, "How can we work collaboratively here, figure out what's the optimal way that we can go to business together?" We're finding savings by doing that, and we're sharing some of that with our partners. Really for the entire good and entire value chain, it's much better. For example, we've had 10 DCs in the last few years.
For 2017, we're going from 10 to eight. For next year, we intend to reduce that again. The facilities that we do have, that existing footprint is going to shrink as well. We'll have just smaller warehouses, better leveraging our retailer warehouses. By doing that, we'll also be able to increase the fulfillment, the order sizes, what rides on a truck, our freight costs for shipments will go down. Again, there's a little bit of an offset there with fewer facilities, may need to ship a little bit farther distribution. Net, we think we're going to come out way ahead. Pre-season direct store loads on key items. Again, nothing revolutionary there, nothing new, but we have much better analytics than we had in the past, and we have much more collaborative relationships with our retail partners.
We're able to optimize how we do inventory builds going into a season, we're really good about that. You bring all that together, I'm going to say we're focused on free cash flow, something we're getting paid on. We're measuring it. The organization is really behind this initiative, and I'm confident we're going to be able to get it done. With that, I'm going to hand it over to Mike who makes sure that things do get done, and he's going to talk a little bit about how we run our business and then as well introduce the rest of the team. Thanks, Mike.
We make a good supply chain guys. I'm really optimistic about where we're going as a company. Jim has this, he would say crazy ideas. When I first met Jim 21 years ago, and I've been with the company, and I've done just about every job, he'd go, "That's crazy. The answer's no." Now I listen and say, "Can I get that done? Maybe I can get that done. When can I get that done? Let's just go do it." I think the change for us and where we're going is there's more passion. I always talk about passion, collaboration, and trust. What we're trying to build with this organization is that we do that as one team across the company. These ideals of focusing on North America, not in hydro space, everybody is wrapped around the one goal, one P&L, and integrating the business.
The team's going to talk about these activities. I'm optimistic. I walked with a major retailer last week. We're walking out and they go, "You know, Mike, I think this might be the best year ever." You're going to see a lot of things that are different. The team is going to talk about solutions. If you don't hear the word solution 100 times today, I will be very disappointed. Solution selling, bundling, making it easier for the consumer. We're really optimistic. I talked about the hydroponic channel. My gosh, how can you not get excited about that? It's happening in the country. We grow things. We're a growing company. Number one use of Miracle-Gro back in the day was for that industry. It was kind of hidden, but Miracle-Gro grows special things. Now we're in the hydro space. It's also for fruits and vegetables.
I'm a growing fanatic. I've got more AeroGardens in my basement than you can imagine. I'm trying to figure out, can I not buy anything in the store for a year? Think about it. I know exactly what I'm putting on that vegetable, whether it's a pesticide or a herbicide. You want to talk about health, you want to talk about wellness, you want to talk about solution. What kind of dirt are you growing your product in? What are you putting on there? It's all about trust. We want that consumer trust. When you go to the store, we're talking about solutions, we are talking about building a relationship with the consumer and the retailer that is far beyond where we've ever been. Randy throws a number, 1% to 3% growth. Our plans are certainly much higher than that.
There's so much opportunity out there to bring consumers into the category. When we meet with retailers now, I will tell you that now all our advertising, our promotional activity, our digital efforts are all integrated. The timing is all matched up. We're all operating as one team to maximize their margins, our margins, satisfy the consumer. Emily's going to come up here and talk to you about the Store of the Future. I can't go and talk to a retailer that doesn't talk about the Store of the Future and how it looks like today and where we're going. We're going to tell you some more about that. You'll see the beginnings of this. I would say over time, it's significantly going to change. It is a topic for the next generation. I did have a slide on that. Paradigm is changing.
It's about simplification, it's about solution. That's really where we're going as a company. We have to be authentic. We have to be in tune. We made a great success. We've always had great talent in this company, we just never worked together. We have met the enemy, and the enemy was us because we would compete for our own space. For the first time, you're going to see Miracle-Gro and Scotts together. You're going to see Bonnie and Scotts. We're going to say, how do these great brands match up to be solutions for our consumer? That's really where we're going. This is the team, and they're going to tell you a lot more. If I could go down the live goods rabbit hole, I can go down the hydro rabbit hole. This is my team.
What I would say about all these individuals is they truly do collaborate and work together, and you'll see the signs of that today that I would say, and I've been here 21 years, we really never had that. We always had talent. We didn't have the full commitment of the team. You have to be passionate. You have to immerse, you have to trust. We have to do what we say we're going to do. I'd rather deal with results than get up here and try to sell you, because the results will come out and prove themselves. I'm actually anxious for you to hear the team and then see what you see out there. Then really showing you three stores. There's a whole lot of other areas and places we're working that are much broader than that.
Don't get into the thing that we're showing you Depot, Lowe's, and Walmart. Chris is working. He's into Bed, Bath & Beyond with AeroGarden. IKEA on live goods. There's a whole host of places we can go that we haven't been before. That's why I'm actually really optimistic about the capabilities, because the solutions can sell everywhere. We just want the consumer engaged. We want that consumer. We'll do it with whatever retailer. Their job is to make it attractive for their businesses to bring it in. We want to be everywhere. We want to be the most trusted, authentic company for lawn and garden in the home anywhere. You trust us. You call us first. That's really how we're thinking about it. Do we get everything right sometimes? No. I'll tell you, my other word is perseverance.
We will never be outworked. With this team, we'll make mistakes. We got more trials going on across the country on different type of sets and that than you can imagine, more than we ever have. Used to be slow, but now we get about there. Let's go try that. Let's go try this. We're learning so much, and we're changing, but we have to get to that level. We will get that growth, time proves that. I'm going to let the team, Emily's going to talk about Store of the Future. I could talk all day. I've got nine minutes left. Emily, why don't you come on up, and we'll go from there.
Don't trip. Don't trip. That's a good start. Like Mike said, my name is Emily Winters, and I lead our shopper marketing and business execution team at Scotts, and I'm really excited to be starting my 10th spring here at Scotts Miracle-Gro. It's a great place to be. We know we've been talking for a while about the opportunity to make a more inspirational and intuitive experience for our consumers in the retail environment. You're going to see a lot of examples of that throughout the presentations this morning and on your store walks. We know that our consumer is going to continue to evolve, and we need to be ready to meet them on their journey and of how they experience the retail space.
We envision a world where the consumer is moving from today, where they want to buy goods and services, and they want to buy a total solution, to a world where they're looking to buy an entire experience, and the experience that they have in the store is part of that overall journey. Let's look at how a consumer would move through the store today. Our consumer in this example is looking to plant a tomato in a container. They enter the outdoor garden center, and they see all these beautiful, lush live goods, veggies, flowers, herbs, and they find the tomato that they want to buy. Then they need to have some soil to put it in, and that's in a completely different area of the store, way over on the other side of the garden center.
They were going to plant that in a container. They have to go find the container back over on the other side of the garden center. If they want to feed that plant to get the best result, they have to go find some Miracle-Gro in the plant food section in a different area of the store. Lastly, the tomato cage is located back over where they picked up that live good in the first place. While everything the consumer needs for that project is located in the garden center, it's not exactly the most intuitive experience. I would say we've made a lot of progress against that with some of our cross-merchandising efforts. Again, you're going to see those when you go to the store today.
We want to take a look at if we were to redesign the garden center experience overall, how could we make it more inspirational and intuitive for the consumer? We've taken a look, in conjunction with our retail partners, at the future of the garden center design. We've looked at this, again, with inspiration, making it intuitive, and aimed at a newer consumer in the space. How does a first-time gardener, how would they approach their outdoor lawn and garden space? In this model, when a consumer enters the garden center, they see the world like they see their outdoors. If they want to plant veggies and herbs, everything you need from the container to the plant to the soil would be merchandised in the same space.
If you want to do a project in your lawn, the lawn fertilizer, the spreader, the grass seed, but also the lawnmowers, the string trimmers, all of those things are located in the same space. In your outdoor garden area where you have mowers, lawn furniture, color, those things are also all located in the same space. In the indoor garden center, there's a section for hydroponics. There's a section for other indoor growing projects. We think that this is intuitive and will inspire that younger consumer, but it'll also be convenient for a more experienced gardener. In this model, a lot of the bulky, heavy items, the majority of that inventory moves more to the back of the store, back here, which facilitates this pickup area, so that it's more convenient for all shoppers to get everything they need for their project.
We think this is going to grow the category and build the basket in a couple of ways. One, everything I need for my project is in one space. Two, with the convenience of the pickup being part of the overall journey and the experience, now I don't have to worry about putting heavy soil, bulky soil, and delicate lightweight plants in my cart at the same time. I can get all of that in one trip. I can get more soil. I can get more mulch because I'm not limited by the size of my cart that I'm pushing around the store. Another key feature of the Garden Center of the Future is what we call the immersion entry. When you walk into the space, it's a welcoming environment. Think about your favorite bookstore.
When you walk into your favorite bookstore, the employees say, "Here's what I'm reading now. Here's some great suggestions about what you should take home with you today." Same idea with this immersion entry. It features simple projects, key things that you should be doing in your space right now, so you leave the store with those products in your cart today. The examples we feature here are growing herbs in a container. There's a lawn patching project. This example also features a kiosk where you could order that project or order more of your products while you're in the store, do your shopping, and they're ready for you in pickup when you leave.
We believe as leaders in the gardening category and our partnerships with Live Goods, that we have the ability to partner with our retailers and really lay out this vision for the garden center of the future. We're really excited to continue to work on it with them throughout this year and bring it to life in-store as early as next season. Now I'll turn it over to Mike Sutterer , who leads our Live Goods and Crafts business team, and he'll take you through more of our Live Goods partnerships.
Good deal.
Thank you.
Yes.
Mike Sutter. I'm the general manager of our Live Goods business. Really excited about this business. It's the most fun definitely I've had in my time at Scotts. Just as a refresher, it was about one year ago that we signed our agreement to acquire a 25% interest in Bonnie Plants. It's been an amazing 12 months, and we've made a lot of progress and made a lot of positive changes in just one year, many of which you'll see out in stores today as you walk stores later. Bonnie is our foundational partner in Live Goods. We're really excited about this category because of the growth potential, especially vegetables and herbs, which is Bonnie's focus area. That's what they're core in. We're seeing growth of 5%-7% a year in this segment. It's really exciting.
It's being driven by those younger millennial consumers that Mike talked about as they engage in healthier eating habits and really embrace the farm-to-table movement. There's a lot of growth out there for us in the future. Just to go a little bit deeper in the Bonnie partnership, since we announced this partnership and deal after our Analyst Day last year, this really is a unique partnership for Scotts. While we acquired a 25% ownership stake in Bonnie with options to increase that over time, it really is about each of us leveraging our core strengths to help grow this business. Bonnie Plants, on their side, they are focused on and they are world-class in growing and distributing live vegetable and herb plants. Bonnie is the largest and really only national supplier of live vegetables and herbs in the U.S.
They have the scale to really make an impact. 72 greenhouses located in 41 states around the country allows them to compete at a level that nobody else can. From a Scotts standpoint, you combine that with our focus on marketing and really consumer-relevant research and development. We're really all about getting those plants that Bonnie does such a great job getting to the store, getting them out of the store, and having the consumer have success with them in their home garden. That's really what we're focused on, and really how the marriage and the partnership is going to help drive growth in this segment for us. What's great about live goods and our Bonnie partnership as well is we can win two ways. Scotts is going to create value two ways. One, we're going to drive growth of the underlying Bonnie business.
We're about inspiring and engaging new consumers to get into the vegetable and herb gardening. The second piece is about solution selling, which Mike and Emily talked about, and we'll get into a little bit more detail about what we're doing with Bonnie Plants there as well. Back to driving innovation and growth on the core Bonnie business. We have put a lot of marketing and R&D effort in just 12 short months against this space. We're launching new products like recipe-inspired combination containers that put all the plants you need to grow a salsa garden or a pizza garden or a stir-fry garden all in one container, making it really simple and really easy for consumers to create a successful recipe. In fact, we're even putting the recipe card in the plant with it to simplify it further.
Another thing we're driving are patio-ready containers, which are the larger containers you'll see here. These larger plants, many have tomatoes and peppers already on them, require no transplant. You just take them home from the store and literally put them on your patio. In many cases, the consumer can buy the plant today and start harvesting tomorrow. It really does speak to that need for instant gratification that we're seeing from a consumer trend standpoint. The last new product that we're excited to launch in 2017 is a complete new line of organic vegetables and herbs from Bonnie. This really speaks to consumers' number one desire when it comes to edible gardening, things you're going to eat, put in your body, and that is wanting a strong organic solution. We're launching that with the Bonnie Organic line in 2017.
All of these items are really under our Success Made Simple line for Bonnie, which is a new line that we're launching this year, and we're already seeing a tremendous amount of positive momentum behind those product launches, as well as a lot of positive consumer and retailer feedback as well. We're excited about the growth potential. It's really about driving new consumers into the veggie and herb category. The reason we love that is because of the second way that we win with live goods and with our Bonnie partnership as well, and that's through driving attachment to our core soils and plant foods business. Right now, today, only about 20% of shoppers who buy a plant, who buy a Bonnie plant or buy any plant, also put a soil or a plant food in their shopping cart at the same time. That's just 20%.
We think there's a lot of upside potential by attaching our soil and plant food or offering the consumer a complete planting solution. Just by example, there are almost 150 million Bonnie plants sold every year. 150 million. Even a little change or a little improvement in attachment or solution selling is going to have a huge impact on our underlying core soil and plant food business. I'd like to introduce John Sass, who's the general manager of our soil and plant food business. He's going to talk about the steps we're taking already in 2017 to better connect Bonnie and Miracle-Gro and sell the complete solution. John?
Great. Thank you, Mike. As everyone mentioned, good morning, everybody. My name is John Sass, I am the general manager on our gardens business. For those of you who don't know what that means, that's all the stuff you need to make a successful garden with all the stuff that Mike told you about. All the soils, the plant food, the mulch products that go into your garden are my responsibility. You could see how excited I get about all the stuff that Mike just talked about. All the new solutions, all the edibles, and the emphasis around getting people into gardening really benefits the side of the house that I oversee, which is our Miracle-Gro brand.
Emily showed the map earlier of that consumer journey that goes through the store, four or five different pieces of parts of the store that a consumer would have to navigate through to be successful. That's one of the things that I want to talk about a little bit more. Consumers today have a challenge to being successful because they don't know everything they need. We want to be able to solve that problem for consumers. One of the ideas that we're working towards, and this is a concept right now, think about from a consumer experience as we drive these new consumers into the gardening category to walk into a retail environment and see everything you need front and center. Emily mentioned this earlier in her display. Imagine for the same thing to have an edible garden with every product you need.
Not only the Bonnie live goods, the Miracle-Gro soils, the plant food, even the accessories, the gloves, the shovels, everything else you would need. Giving the consumers the total solution and think about the win-win-win of that. The consumers have everything they need, the retailers can help drive a bigger basket, also, obviously, we benefit by having multiple parts of our product line leaving the store with the consumer. Before we get to there, we're going to still keep working on the future solutions like this, we're going to work real hard right now to make sure that we can connect these two great brands together in store. A lot of the stuff you're going to get to see here in just a couple of hours when you go over to the store and see the products for yourself.
One of the things that Mike Sutterer did when he came onto the business, Lukemire mentioned this earlier about us being aggressive and learning and testing and moving fast. Mike came onto the business, every single piece of printed material from a Bonnie perspective has been updated to include that cross-sale with Miracle-Gro. You see here the logo lockup at the top, Bonnie with Miracle-Gro, "Plant it right, use Miracle-Gro soil." That communication, that attachment message, is on every piece of communication in store. You'll see it today when you go see it for yourself. The bottom left here, the plant trays have the tag on it. The Bonnie plants that you actually take home have the message on the wrapper, the tag that goes in the plant as well.
We are going to continue to make sure consumers take all of our products home with them because we know it's going to make them more successful. We know it's going to have them build a better garden. In addition to that, here's a visual from a retail store we have today, you can't walk very far to not see our soils and plant foods right next to the live goods racks as well. Mike Carbonara and all the sales guys have done a great job of cross-merchandising in store, making sure, again, that these two brands are connected pretty well. In addition to that, we're not waiting for a consumer to get to the store to be able to see this relationship and this partnership with our two great brands.
We're going to use all of our media marketing tools as well to tell consumers as they enter into the category, everything they need with Miracle-Gro and Bonnie. One of the things that we're doing on our side of the house with our advertising on Miracle-Gro, every Miracle-Gro potting mix TV commercial this year will be tagged with a call to action about planting your garden with Bonnie and Miracle-Gro. I want to show you just one of those examples here, if we could show the TV commercial.
He likes things from the microwave. She likes things from the forest, like Miracle-Gro potting mix. Patiently aged and beautifully blended to grow stuff better. So rich, it should file a tax return. Start your garden with Miracle-Gro and Bonnie Plants.
It's a quick example, and we have many more of these, but we want to make sure that consumers know that if you're going to start your garden, you want to do it with the best plants available in Bonnie brand, and also make sure you start it right with Miracle-Gro. That message is carried out through a lot of our advertising this year. In addition, the work that Mike is going to do on the Bonnie advertising also includes the cross-sale with the Miracle-Gro soils. You'll see that come to life here in the next couple of weeks for spring. In addition, we're creating all new custom content for our digital and online solutions that have projects for consumers that really incorporate both Bonnie and Miracle-Gro to really help sort of solve those challenges for new consumers that come into the category.
Lastly, I mentioned Mike has touched just about every piece of POP. Well, we're leaving no stone unturned here because Mike has even worked on updating the delivery trucks that are going to drive the Bonnie Plants to stores. Also, you'll see rolling out this starting this spring, the cross-sale with the Bonnie and Miracle-Gro relationship. Again, making sure that we are utilizing all of our assets that we have, all of those marketing tactics to connect these two great brands. Fundamentally, at the end of the day, not only does it work well for our business to drive growth for the soils and plant foods, we know it's going to make consumers much more successful in their gardens and keeps them in the category and coming back to do more.
We're really excited about this partnership, but at this point, I'm going to turn it over. We're going to switch gears. I'm going to call up Josh Peoples. He's our general manager on our lawns business. He's going to talk to you about some of the Scotts programs we have.
Good morning, everybody. Again, my name is Josh Peoples, and I lead our lawns business. This will actually be my 18th season here at Scotts, so it's really amazing, I think, to see how the company has just transformed itself, not only from the products and a lot of things that are being introduced to you today, but really on how well it is integrated together. I've got some, I think, some really cool novel things that we're going to be doing here in 2017 and beyond. One piece I'd like to start with, and I know Randy and Mike hit on this a little bit earlier, for the lawns business, and when I say lawns specifically, I'm talking about our lawn fertilizers, our grass seed, our spreaders, and also our new endeavor over the last couple of years into outdoor cleaners.
One of the things that is really imperative for our company and its financial health is our lawns business, primarily our fertilizer side of it. I would say two critical things that come about whenever I call this the Scotts play is, one, it being multifaceted. Historically, we spend a lot of time selling a product at a price, and that's been a little bit of the relationship. What you see here is how multifaceted the strategic selling is with our sales partners as well as with the retailers on it's not just about the product. There are so many other components that come into this that we need to be very tightly integrated in with them. The second piece to this is how this is done over multi-years. Not only, again, is it multifaceted, but doing it over multi-years as well.
Not just looking at 2017, or I guess now we're already planning into 2018, but giving a longer view of how we can truly grow not only our brands, but obviously the categories as well. This becomes really imperative here with our lawns business. I'll quickly take you around the horn here. The bread and butter of this is still about our consumable business and innovation. I would say there's a really robust pipeline that's coming, that has been working for some time now over the last few years. The second piece of this, though, is really looking at non-core category growth. One of the things that was alluded to earlier was our hydroponic space.
Another thing, and Patti Ziegler, the next presenter that will come up here, will get into a little bit more depth around this, is the whole smart home and connected devices that we have actually made some acquisitions within the past 12 months as well, that we are going to be, I think, really making this impactful for consumers to simplify not only the experience, but make sure that they are getting tremendous success as well. Continuing to leverage our sales support all the way through the solution selling pieces of this. Randy hit, I think, on one of the really important things, especially on our fertilizer business, which is around the integrated supply chain and making sure that we are becoming as efficient and continuing to evolve how we distribute and get products to the retailers, especially as their supply chain evolves as well.
The marketing and media collaboration, I will jump into that a little bit more on the next slide, I think it has become so impactful on how it is not just from aligning on timing, it is also on the mediums, it is also on the messaging, and how we can make sure that those are integrated and working well together to hit consumers at all points as they are going through the funnel and getting ready to either make purchases to after they have already put down a product and used it and are able to respond back socially and other mechanisms.
The last thing here around the shared risk and share reward, I think it has been brought up quite a few times, and you will see this in the stores today, just how many new things that we are trying, and testing, and learning, and making very quick decisions to be able to then scale those out more nationally. I think we were probably always a little slow to the punch in the past, now I think you are really seeing how quickly that we can react to market conditions and then be able to really take advantage of those on a very broad scale. Let us look at some proof points.
I think, again, this is one that we started with a few customers here in 2016, now we are taking that through what I will call our top 10 here as we move into 2017 and 2018 around running the Scotts play. One of the biggest pieces of this has been just the unbelievable integration and collaboration that we have had with many of our retailers. You see it is everything from, like I said, outside of the store with TV and media, all the way through in-store displays, and really making it easy for consumers to know what to buy, when to apply, and why Scotts is the product they should be using. I think what becomes even more impactful is the result, right?
A little bit of proof here, I think goes a long way, where the customers over this past year where we actually ran, I'll call it the total Scotts play, they saw, call it mid to high single digit category growth. Scotts was in line with that. I think we started to see a ton of momentum to where we got basically our top five customers running the Scotts play here over the back half of the calendar year, and you can see the results that have happened. Up 12% on the overall Scotts lawn business. Our lawn fertilizer is up 8%, you know that this is a category that has been stagnant over some time. Seeing these results, I think, really shows the power of integrating and collaborating together.
What's even more powerful here is the first six weeks of the season in some of our key markets here in the South, you're seeing that lawn fertilizer number be up anywhere from two to three x that number out of the gate. Again, I think it's showing the power of working together, doing it over a longer horizon and not just being a short-term win, and really pushing the category and Scotts being the leader within that. What's next? I think this was alluded to earlier, while maybe it shouldn't have taken us 149 years to bring these two brands together, what we're going to be doing for the first time in 2017 is actually kicking off the season here in a couple of weeks in the South, bringing Scotts and Miracle-Gro together.
I think what's really powerful about this is, this is a big category push. This is for those that are fence sitters. I'll say those that are probably more reactive to the category, only when there's a problem. This is meant to inspire them. This is also meant to give them an incentive to buy multiple products and provide the solution. It's a totally integrated plan, both with media as well as in-store components. I think what's cool about it is that, again, over a longer horizon to where 2018 is obviously a big anniversary for us where we'll celebrate our 150th. This is something that we're going to roll out here in 2017. We'll be able to scale out bigger in 2018 and beyond.
I think similar to what the team went through on Bonnie and Miracle-Gro, just another way to bring the power of these two iconic brands together to get people out and going to kick off spring. With that, we've got the TV spot that we'll run.
It's spring. We can't wait to open our sheds and get working on our yards. Scotts and Miracle-Gro are here to help. We make it easy to grow thick, healthy lawns, spectacular plants, and bountiful flowers. When spring starts right, the months that follow stay perfect. Load up your shed with Scotts and Miracle-Gro. It's time to get outside.
As you can see, a call to action gets you kind of revved up with spring is here and spring fever has hit, and obviously then providing consumers an incentive to go out to bundle up and buy everything that they need for the upcoming season. The other thing, and the last thing that I'll hit on here, is a new look for the Scotts brand when it comes to from a messaging standpoint. Really the point of this is to really hit on two things that we've learned over the past couple of years. One is consumers want to know what to apply. Just help give me the basics. Number 2, it's when should I be doing that?
I think what we've tried to do within this campaign here is to wrap this up in a really authentic, straightforward way that presents the product actually in a much different way than we've done in the past. In this execution here, we even go and leverage and utilize one of our scientists to really, I think, bring to life what the Scotts brand is about and has been about for over 149 years now. The fact that we spend a tremendous amount of time and effort and expertise to make it as simple and as goof-proof as possible for consumers.
This is one spot of many that will be rolling out here in 2017. Again, does a great job of really connecting and activating that hand raiser and person that's in the category and letting them know what to buy, when to apply it, and why Scotts should be the choice for them.
Every time here. This is a Scotts yard.
Really excited. We're off to a great start. Again, I think a lot of the collaboration and integrations that we're doing with the retailers have really shown some awesome momentum, and we're going to continue to push that not only in the 2017 season, but years ahead as well. With that, I'm going to bring up Patti Ziegler. As I alluded to, some really cool stuff on the technology side, not only from an app and digital standpoint, but also from the devices, it's really exciting stuff.
Thank you, Josh. As Josh said, I'm Patti Ziegler, and I am lucky enough to be starting my sixth season at Scotts and looking forward to it. 4-1-1, I'll never forget my first day, such an easy number to remember. We're heading into it, and I'm pretty excited. Josh talked about engaging consumer. He talked about kicking off the season, and I'm here to talk to you a little bit about how technology is going to make that even better by engaging even a little more deeply. All of you have this little thing in your pocket. It's the window to your garden, is the way I like to think about it. And that's why we came up with the concept of the Connected Yard mirrored on the smart home. At Scotts Miracle-Gro, we call it the Gro Experience. Run the video, please.
Introducing the Gro Experience. Temperature, humidity, wind, soil, and pest conditions, can automate everyday maintenance, help you save water, grow with confidence, have a more personalized relationship with the green in your life.
The Gro Experience in the future, and actually this future is actually right here mostly today. You can have all of these things connected through your smartphone to help you run your lawn and garden activities. Instead of a chore, most of it is automated. It is automated by learning, just like your Nest thermostat can learn with you. Working with Alexa, you could actually have your garden speak to you and tell you what chores you need to do personally today. You could have your robotic mower out there taking care of the lawn every single day, you don't have to always have that nice smell and that nice crisp lawn. All this is done through the integration with a smart controller and a smart sensor, which are two of the products Scotts is bringing to market this year underneath the Gro Experience.
Here is just a simplified version of how the system works. You have your Gro app, which is on your phone, which you should all V2 went into the iTunes store yesterday, be sure and download the Gro app. That means we will have this many more downloads. You can use it to coordinate with your sensors and your controllers, as well as helping you identify projects that are of interest to you, that are trending in your area, that are easy to do with plants that are native to your area, and help you not only manage your water and your resources, but your time more effectively. We talk about how it helps you get connected to the green in your life.
Exciting news, which Josh alluded to, the Blossom and PlantLink water controller and plant sensor are now part of the Scotts brand experience and will be Scotts branded or integrated through the devices through the app. We have the technology supporting direct to consumer, within the Gro Experience, you can now engage with activities as well as purchase products to help you, again, simplify in creating another solution that brings the lawn and garden experience that much closer to you all through the window in your pocket. We launched the Scotts app, the My Lawn app, that was launched three years ago now, it has tremendous consumer engagement. Josh talked about that consumer that just needs to know what to do and when to do it. The app takes care of that.
We continue to iterate and improve on it, are very excited about the results with consumer engagement. In a world where lots of apps are deleted from people's phones, this one sticks around and has a very high reconnection rate. The Gro app we launched last year, this year we just launched version 2, learning from some of the feedback we had from consumers and improving it, as well as creating a little more intuitive experience connected to the devices, which we have been challenged by Jim to be sure that it is seamless and continue to work to make sure it is looking into 2018 and thinking about total plant health and water management.
John talked a little bit about the soil management and finding plants and all of those things where you have the plant sensor, and you can be sure, total plant health, as well as managing your lawn. Water innovation, this is sort of the pipeline of what is to come. The Connected Yard, I've told you a lot about this year and what we're launching. We are having some drip irrigation products that we are putting into the portfolio, as well as looking to liquid feed and how we can add more aqua feeding to your process. Alluding back to Emily, or going back to what Emily talked about, where we are growing now.
The Gro app and water management and some of the new devices are going to be aggregated within the retail environment, providing more and more opportunities to get the consumer engaged in the category, remind them that the smartphone can help them identify what they need to do, when they need to do it, connecting that consumer, and helpfully encouraging them to do more. We do know that if consumers know more, they do more, we continue to drive education, whether it's through the mobile device, the laptop, and their mobile tablets. We are ensure that we are everywhere they need to be, and The Scotts' digital ecosystem has grown over the last years to do that. We are very active in all the media channels you would anticipate and engaging our consumers in an ongoing dialogue about the green in their life. Thank you.
I'm introducing Tim, who is going to talk to you about controlling the controls world.
Thank you, Patti. Good morning. My name is Tim Martin. In a couple months, I will be celebrating my 15th year here at The Scotts Company, Over that tenure, I've had the opportunity to work on just about every brand in a marketing capacity at Scotts. Today, I lead the Controls business. What is the Controls business? It's basically a portfolio of brands that help consumers solve problems, help solve lawn and garden problems. If you look at left to right there, Roundup, arguably the biggest brand in the Controls segment. Home Defense and Ortho. We've got 100 years' worth of experience in consumers trusting the Ortho brand to solve their myriad of lawn and garden problems, from weed control to plant disease, but more specifically, in insects.
Finally, our newest brand in the portfolio, only three years old as far as we're concerned, the Tomcat brand. In those three years, we've taken a brand that was number 3 in the category and catapulted it to the number 1 brand in mice and rat control. With these three powerful brands, we feel that it is our responsibility to grow the category. In fact, it's our number 1 priority. What I'd like to do today is just sort of walk you through our plans with each of these businesses to show you how we're extending the brands into new spaces beyond what they are today and helping provide complete solutions for the consumer in the Controls category. First, we'll start with Roundup.
A little background here in case, I'm sure most of you know, The Roundup business today is a share. We share the earnings of the Roundup business with the Monsanto Company, and that is specific to the non-selective products that we offer. Your base Roundup with the blue cap, the Weed & Grass Killer, Roundup Extended Control, Roundup 365, Roundup Poison Ivy, all of those products, we share the earnings with Monsanto. In 2015, we signed an agreement with Monsanto that allowed us to do two things, extend the brand into new segments beyond those that I just mentioned, and then secondly, those earnings are 100% Scotts Miracle-Gro. We do not share the earnings from these brand extensions that we'll be launching in the next couple of years. First up, excuse me, is Roundup For Lawns in 2017.
What you'll see here in the stores today is how we integrate this new launch of Roundup For Lawns. It's a selective weed killer. You can actually use Roundup now in your lawn, and it won't harm the grass. It'll just kill the weeds. We'll put it in context with the rest of the portfolio, again, sort of providing the consumer with a complete weed solution regardless of the area that you're using it in. You'll see this end cap in The Home Depot. It's the number 1 end cap in Depot. We also have great placement at Lowe's and Walmart, and it will be supported with a tremendous advertising campaign linked to the Draw the Line campaign that we launched last year. If we can run that advertising now.
Today, it's the dawn of a new lawn. That's because new Roundup For Lawns has arrived. Finally, there's a Roundup made just for your lawn so you can put unwelcome lawn weeds to rest. Draw the Line. With Roundup For Lawns, there's no better way to kill lawn weeds to the root without harming a single blade of grass. It's a great day to be a lawn. Draw the Line with Roundup For Lawns, and for weeds in other spaces, turn to Roundup Weed & Grass Killer products.
You can see at the end of that spot how we tie in the rest of the Roundup family to help reduce consumer confusion, also incent them to put more Roundup products in their basket for basket building, then in the end, obviously, drive the category in 2017, drive category growth. Switching over to Ortho and Home Defense today, Ortho Home Defense is a product. It is the number 1 indoor and perimeter insect control ready-to-use product in the marketplace. In 2017, we're launching a broader portfolio of products under the Home Defense brand. No longer will it be just a product, it's going to be a total complete solution for consumers to control insects in and around their home.
This includes ant and roach bait, a line of Home Defense aerosol, we're even extending it outside into the yard with a line of Home Defense lawn insect products. An ICS, it's a granular product, a concentrate. You can see here how we're communicating it in store and online. It's this idea of whole home protection. There are layers of protection, that you can keep bugs out of your house by applying it inside, around the perimeter, even extending it into the lawn where ticks, fleas, and mosquitoes, those things that mom is always concerned about attacking her kids and her pets, for a total solution in Home Defense. We're also launching a line of Home Defense bedbug. You saw a picture of it in a slide earlier. It's a portfolio of products that help consumers treat if they do have bedbugs.
If you know anybody that has had a bedbug issue, it's an extremely emotional issue to have. Home Defense is designed to provide the most effective product out in the marketplace today. A majority of bedbugs are resistant to pyrethroids, which is what our competitors base their formulas in. Ours are not. They are targeted towards specifically those resistant bedbugs to make sure that consumers have a tremendous amount of confidence that they're going to get the problem solved. Later on this year, in the summer, we will launch a bedbug trap with a pesticide-free patented pheromone that will likely revolutionize the bedbug category. Here is a product that you simply just set underneath your bed. It attracts the bedbugs to it out of their hiding places and then traps them and kills them. We're very excited about that launch later on this summer.
Then finally, Tomcat. Extending the brand here, again, that's the theme of the story. Today, Tomcat is the leading brand in rat and mice control. We're extending that brand into a broader animal nuisance category. We'll take our existing repellents business and move it into the Tomcat brand. We'll also be launching a new Tomcat trash bag that is designed to repel raccoons and other rodents and keep them away from your trash. On trash day, when you walk outside, you don't have trash all over the place. This does 2 things for us. Number 1, it provides an entire solution. It opens our aperture as we look at this category and start to innovate within the Tomcat brand and look at other animal nuisance opportunities beyond rats and mice, as we do today.
Secondly, it extends the brand across the entire year. We get out of the spike that we normally see in the fall with rats and mice. When it gets cold, they start to move into your house. Now we have a portfolio of products that you see there on the right. That's a solution display that we will have up in stores this year. We can have that display up all year long. In the spring, we can talk about a repellent and protecting your vegetables and your landscape plants from deer and other critters that might eat them. In the summer, we can focus on mole and vole to protect your lawn from those. In the fall, back again to our heritage in the mice and rat category. All while, all year long, being anchored by those Tomcat trash bags.
We have a ton of new news coming out in 2017. I'm really excited, and I think it's going to be a fantastic year for the Controls brand. With that, I will hand it over to Chris to talk to about hydroponics.
Thanks, Jason.
You're welcome.
All right, guys. I'm going to talk to you about Hydro, also spend a little bit of time talking about our Craft brands, which Mike Sutterer will join me with next thing. He's probably just going to hang out down there for a little bit. All right. When I spoke to you guys last year about the Hawthorne business, we really had it broken up into two distinct segments. We had what we called our Craft business, which was the roots of Hawthorne, which was brands that were designed for younger consumers, more traditional gardening brands than Hydro. Soils, organic plant foods, that kind of thing. Brands like Whitney Farms and EcoScraps, and our initial investment with AeroGarden.
The other side of the business was our expert business, or Hydroponics, which is one that I know people want to hear about because we spent a lot of time and a lot of money on over the past year. We made the decision about four or five months ago. We started discussing at least the idea of breaking the two businesses apart and really just having the Hawthorne management team focus exclusively on Hydroponics and hand the Craft team off to a brand team in Marysville, in this case, run by Mike Sutterer, also of Live Goods fame. We went through the planning probably starting around October after our national sales conference. We closed our Botanicare deal. We continued to see a lot of momentum there, a lot of interest from folks like you.
The more we thought about it, we said, between focus and just our ability to continue progressing the business and keep the momentum, it makes sense to split the brands up, particularly with craft focus from a retail perspective, really settling into SMG kind of core retail channels, places like Walmart, Lowe's, The Home Depot. It seemed to make sense to give that business to someone who understood what we were trying to do with those brands and also understood the channels that they were selling in even better than we did. With that in mind, we split the businesses at the beginning of this calendar year. We've recently gone through that kind of restructuring, leaving my team squarely focused on hydro. With that said, I'll go to the next couple slides here. Mike Sutterer talk a little about the craft business.
Great. Thanks, Chris. Appreciate it. Thank you for leaving me with an awesome business with a lot of momentum on it. I'm really excited about the craft Hydroponics side of the business or mass hydros side of the business. It is a rapidly growing dynamic part of the business for us and really an opportunity for us to create a category that didn't really exist just a few years ago. I'm talking specifically about indoor gardening. The numbers, the growth trajectory here, this is all focused on sort of craft mass hydro side of the business. Chris will talk more later about the expert pro side. Today, 14% of households participate in Hydroponic gardening. And that number, while small, is double what it was just 12 months ago. It's doubled in just 12 months.
As you can see from the chart, another 38% of households have strong interest in participating in hydro gardening. If you total that all up, it's 52% is the total opportunity, 52% of households. That number is actually on par with the same penetration we see on our traditional outdoor categories, outdoor gardening categories. A lot of upside potential here. The thing that we really like about it as well is, as Chris mentioned, these shoppers, the mass hydro shoppers, they want and expect hydro solutions to be available at traditional lawn and garden retailers like The Home Depot, Lowe's, Walmart, and others. It sets up really well for Scotts to be able to capitalize on this opportunity. These craft growers, it's really not just about growing a single crop in their home.
They really are looking to grow a wide variety of things, vegetables, herbs, flowers, fruits, really anything that you can grow, these consumers are looking to grow hydroponically and specifically indoor. What really motivates them is the ability to grow 365 days a year, which is unique in gardening, being able to participate all year long. What's really exciting about that for us is they need to buy and use our products to support growing 365 days a year. Unlike traditional gardening products, which primarily are focused on purchasing in the spring and a little bit in the summer, this is really, truly a year-round category and a year-round opportunity for us. As we think about capturing that opportunity from a craft standpoint, we've created two new brands, each with a unique positioning that we're really excited about. Black Magic was our first foray into mass hydro.
We launched that last year with The Home Depot. That really has a more edgy focus or an edgier focus, and is targeted really more to the traditional hydro grower. In 2017, we're launching the Root Farm brand, which will be at Lowe's. That has a much softer focus and really is positioned or targeted more towards vegetable and herb growing inside the home. We think these two brands are a great way to get some in-market learning, especially as this is a dynamic, rapidly changing category. We want to be out in front of it. We also have designs where we're starting with The Home Depot and Lowe's. This opportunity extends to Walmart, Ace, and other retailers as well. We're not just limiting our focus in craft or mass hydro to these two customers.
One of the other really exciting things about leveraging the work that Chris is doing and his team with the mass or craft hydro opportunity is coming to life in the solutions that we've put together for the mass hydro or craft hydro consumer. I'm going to spotlight one here, although an entire line has been developed, which you guys will see as you go out into stores later or is right outside the doors here.
I'm going to focus on this growing system that really has been developed in a partnership leveraging our pro or expert hydro businesses like General Hydroponics and others, taking that expertise and combining it with The Scotts Miracle-Gro research and development and marketing teams and their focus really on the consumer home gardener, has really designed a unique, innovative new system that will help consumers be successful in the mass space with an indoor growing system. On the left, this image on the left here is really the industry standard in kind of traditional hydro channels. That is a General Hydroponics grow pail or grow bucket. It essentially is a bucket that you grow hydroponically in.
In the last 12 months, just 12 short months, we basically created an entirely new system that is going to be commercialized here in the very near future, just the next couple of weeks, that simplifies dramatically the growing experience inside the home hydroponically. It's cleaner, it's self-contained, it's easier, and probably the most important thing for this mass hydro target, it's much more aesthetically appealing. That system right there allows us to take hydroponic growing out of the basement or the closet and really put it into the living room or kitchen, because that feels like an accessory that you wouldn't mind having out in your home 12 months out of the year. As I said, that's one example.
We do have a complete line that's been developed of mass hydro products, which includes the lighting, which you need to grow indoors successfully, again, leveraging our partnerships on our AeroGrow side of the business, as well as nutrients and other supporting products that a consumer would need to be successful in this space. We've done it in a very short period of time. Lastly, because we are entering a new category or really creating a new category with indoor gardening, we need to take a different approach from an in-store merchandising and marketing standpoint. We have implemented some unique in-store merchandising vehicles. You'll see some of these as you walk stores today.
It's really about getting hydroponic gardening or getting indoor gardening out of the traditional gardening set into a different area of the store, presenting it in a unique and different way, because these are different shoppers than the traditional gardening consumer. We want to intercept them with a different merchandising concept in store. From a marketing standpoint, we're really targeting more non-traditional media vehicles to reach these consumers. Much more digitally focused, much more focused on social media, targeting consumers where they are with relevant content and information to inspire them to grow hydroponically. I'd like to show a couple of different videos now. One is focused on our Black Magic brand. You'll see a commercial for Black Magic that's going to be airing digitally, and then follow that up with our Root Farm brand.
I think it'll do a nice job of showing the differences as well between the two brands. Could we roll the Black Magic video, please?
These are growers. You'll find them above dive bars, in basements, and under the cover of darkness. They seek perfection on a level that would drive lesser souls to madness. At Black Magic, we salute them, but they don't need our praise. They'd rather have our soil. Dark, rich, crafted to deliver performance that doesn't yield to conventional limits. Black Magic, yield to no one. Available exclusively at The Home Depot.
That's Black Magic, much more edgy in terms of its focus. I'll show you the Root Farm video which is a little softer, more focused on edible gardening.
What farm grows food 365 days a year? Introducing the new Root Farm Hydro Garden System. Imagine, fresh herbs and veggies within arm's reach.
That's Black Magic and Root Farm. Again, really excited.
Available exclusively at Lowe's
I'm really excited about the craft hydro space and the opportunity we have there, particularly growing with our traditional lawn and garden retailers. I'm going to turn it back over to Chris, who's going to talk about all the great stuff we have in expert.
Thanks, Chris.
All right, guys. Getting back to sort of the expert or sort of core hydro side for us. Really the way we looked at it was it was separated by kind of channel. Mike kind of took over the things that were sold through SMG traditional channels, and we hung on to things that were sold through either our hydro channels or unique channels like Bed Bath & Beyond, as Mike mentioned earlier, with the AeroGrow brand. Moving into Hawthorne, the story's good. The outlook remains pretty strong. The brands are healthy businesses, three-year CAGR of over 20%. We made our base cases for these deals pretty conservatively. We had some assumptions in there that we would incur frictional losses just due to the deal and integration. We made our base case financials pretty conservative, and we've outperformed those consistently.
Our 2017 guidance, again, is a relatively conservative 10%. I think our internal expectations between you and I and all of us are that we will exceed those. But again, we want to take a relatively conservative case that still exceeds the deal economics, and that makes us feel pretty good. One thing that we do need to keep in mind with these hydro brands is that quarterly growth rates are going to be a little chunky, and I will explain why that is here. Because it is a very different type of business than traditional lawn and garden. And there are really three main factors that go into explaining why the growth rates tend to get a sawtooth pattern as it goes through the year. If you follow that line all the way across, it's a good upward trend.
What we're looking at is the business is divided right now between consumables like growing media and nutrients, then more high-ticket hard goods like lights and systems and plastic trays, that kind of thing. Those two different categories of products are consumed really differently by growers. The nutrients and the growing media really fit the SMG model of, or the Procter model of things you flush down the toilet or flush down the sink every day. So those are getting bought on a pretty consistent basis and every week or two weeks by growers throughout the year. There's some seasonality, but it's pretty limited. The other products, lighting, trays, that kind of thing, those are what you call project-driven purchases.
When you have a large-scale grow that is being installed in Denver or as legislation continues to change in places like Massachusetts and Maine and Nevada, what you're going to see is someone showing up and coming to our lighting company, Gavita, and saying, "I have a 10,000-light project that I'm doing," and that's a 10,000-light sale. Those guys aren't going to buy lights again for another few years. So you see a real big spike and some projects that are large enough where you will say, boom, the quarter is done with one sale to one grower because it's a project that large. The same goes for things like our Botanicare trays. Again, people buy those once and they don't have to buy them again for a few years. So you will see some chunks when you just get big projects that are coming online.
Another thing is timing of promotions. They're a really promotionally based business. From a retail perspective, retailers really like driving promotions through. The distributors like it as well. The timing of the promotions tends to really increase sales. And related to that, this is a two-step distribution model. All of our products, with a couple exceptions, goes through one of the three main hydro retailers. Some, like Supply, BWGS, and Bloomington Wholesale Garden Supply, are supply and Hydrofarm . Those distributors, they load in product, so they will load up all their warehouses and DCs and sell through that product over the course of the year. So when those large distributors make their purchases, we will get a big spike in our POS or our revenue, and then they will sell through that product.
Again, just to explain a little bit, if you guys dig into the numbers, it will look a little funky relative to SMG. It's just the nature of hydroponics. Overall, the story is really positive, really strong. Really building on the positivity that it's a really great time to be in hydroponics right now. The word that we've avoided saying up to this point has been cannabis. We're not in the cannabis business, but we serve the cannabis business, and we want to work closely with it. For us, looking at the state of affairs right now in the U.S., particularly coming through Election Day, which was, personally speaking, a mixed bag. It was a really good day for our business. We had a lot of states that voted positively for us.
We got a guy who at least claims to be pro-business, so I'm optimistic in that regard in the White House. The bottom line is more states than anyone expected voted positively on this topic. More states legalized. The one state that had recreational on the ballot that didn't pass it was Arizona. We're actually, as of last week, we are in the process of trying to hire the people who were behind the marketing campaign that stopped that from succeeding. Figure if we can't beat them, hire them, have them help us. It was primarily pharmaceutical companies. There's a company in Arizona called Insys Therapeutics, the largest producer of fentanyl in the country. They very publicly put a few million dollars behind the campaign to get that amendment defeated.
You take that for what you will, whether they're trying to protect their fentanyl and opioid sales or trying to box out until they develop a synthetic cannabinoid replacement. That's something I don't know. What I do know is they've been pretty open that pharmaceuticals have been the people lobbying against this in the states that have been successful, which have been limited. That said, the business is growing like crazy. The category's growing well. There is national acceptance on a level we haven't seen. More people are choosing to use cannabis than we've seen before. I think a lot of that's related to different ways that people can intake the product.
Where it used to just be a flower that you smoke in some way, now there are edibles, extracts, and concentrates, and other things that make it a lot easier for people who don't want to smoke something, particularly when a lot of states, this is considered a medicine, to ingest that medicine in a way that they would consider healthy. It's a really exciting category for us right now. There's so much that's going well for us. There's so many tailwinds. One of the really exciting things is we see this change, and it makes it interesting because every state up to this point has unique legislation. Some legislation, like you see in California, Proposition 64 that passed in November, says that the law really limits the size of growers.
You see a lot of really small growers in California, which is interesting, and it works well for us because it's really where our business has been optimized up to this point. We expect to see on a more national scale, though, is for larger scale commercial growers, the likes of which you see in Nevada and Colorado, begin to be the norm. That's a huge amount of growth for us. They expect different things from product, different things from service. Those are all things that we'll develop, and we'll talk to you about in a little bit. We want to be your solution again. Our plan, become the leading solution provider for hydroponic growers both small scale hobbyists and large scale commercial. That means, again, we talked about this before, probably some additional M&A work to come. Nothing huge.
Maybe some pretty sizable deals, some really exciting strategic moves for us. We're a couple of years into the whole Hawthorne journey. We've learned a lot, I think, and some real key success drivers have emerged. They're really what we expected, I think, which was if we want to do deals with successful companies, and we do, and we have, we don't want to mess those businesses up. Again, with those deal financials, we assumed some degree of frictional loss just due to integrating into a larger business. People who've gone from really informally operated family businesses to being part of a much larger, much more structured business. We knew that keeping the teams in place, maintaining cultural continuity was important for us, and we were successful in that, and I'm really proud of it.
The other thing was we don't know this space, or at least we didn't at the time. We from Hawthorne or from SMG. We know lawn and garden, but this isn't traditional lawn and garden. It's different. Keeping the founders of the business in place was important. We were able to do that as well. We've kept a really smooth transition through the business. We've been integrating. We've really just begun the integration. There's a lot more work to do. Continuing M&A activity, like I said, we've hit our numbers the whole time. It's been a good story of trying to do a lot, trying to keep a lot of balls in the air at the same time. Obviously, the most important thing is to actually make your numbers, and we've been successful with that.
We really have three key objectives moving into this year, moving to 2017 and beyond. The first, obviously, is integration optimization of the businesses that we've acquired. We've got a lot of work to do there. Really hand in hand with that is integrate those businesses so that we can deliver the best service in the class. Again, whether we're talking about how we're going to service a retailer who sells to the individual hobbyist with one plant, or how we're going to sell directly to a large-scale commercial grower with 10,000 or 100,000 plants, we have all the tools to be the best service provider to this industry, and we plan to do it. Then finally, as I said, continue to fill in the gaps in our portfolio with some tuck-in acquisitions and some other things on the M&A side.
Digging briefly into each of those, from the integration side, it's a pretty complicated task. We bought businesses in California, Arizona, Amsterdam, Colorado. All those businesses are successful. They all have their own distinct and unique cultures, their own sales teams, their own branding, and their own supply chain. We're looking to integrate both from a supply chain perspective, all of the businesses we bought, along with, where applicable, SMG supply chain, is going to be really important for us. Making sure that we're handling our brands intelligently so that we're not fighting ourselves, that we're using our brands to protect one another against competition, integrating our sales teams which is nationwide now, just introducing for the first time ever to the category, real professional category management. You have brands that have products that compete with themselves within one brand.
Being able to introduce a real professional category management approach, I think, is going to really help us out with our retailers, it's going to feed into this next step of providing the best service that we can. When we talk about supporting revenue growth, it's not just making sure that our plants can supply enough product for us to get through our promotional periods or anything like that. It's supporting the revenue growth of our retailers and our end consumers as well. As their businesses grow, we need to be there with them to support them. That's somewhat unique in our category because a lot of people don't have the ability to scale.
As this goes truly national, as more East Coast states come online, I just want to sort of set people's expectations there that when you see a state like Maine or Massachusetts legalizing cannabis at a recreational level, don't fall into the trap of thinking that there's going to be an immediate sales bump in those states. The legislation takes at least a year to be rolled out, probably another 6 to 12 months to be implemented. There is a little bit of a lag time on those states. When they come online, very few of our competitors are going to have the ability to get product at a good price to those regions, simply because the businesses are all kind of based on the West Coast, aside from us. Execute the operational synergies, as I said, move on to SAP.
SAP is big for us, again, as we expand nationally, being able to plug easily into the existing SMG infrastructure is going to be a huge advantage for us, SAP allows us to do that. It's already been implemented to GH. It's rolling out to Botanicare and Gavita . Finally, M&A growth for us. As has been said a couple times already, we're still learning about this category, to be frank, the category is still evolving. There's still a lot of things that no one knows because it's all happening as we watch.
The work that we've done is we've seen that to be a total solution provider to this category and to be able to walk into a large-scale commercial grower that isn't built yet and say, "We can offer you every single product you need, including an ongoing tech service relationship well beyond the point of sale," is something that we need to do. To do it, we need to acquire some additional capabilities, some additional skill sets. When you look at the business, you see things like air and water handling, things that Scotts doesn't really do, certainly Hawthorne and none of our brands do. It seems like we have a need to go out and make some deals.
I think we've got a line of sight to deals that are relatively small now, businesses that are pretty immature, that have really breakthrough technology, that if we can acquire them or partner with them now before they grow along with those large-scale growers, we think we can get a pretty good deal on them. That's our intent. We've got a lot of really exciting stuff to announce to you guys over the next probably six to 12 months on the deal front. We're super optimistic. R&D has got a lot of innovation coming, and it's a great time to be in hydro. That's all I got.
Thanks, Chris.
Good morning. I'm Mike Carbonara, I'm President of North American Sales. I've been with Scotts Miracle-Gro Company for 23 years and retail sales business for 38 years. Needless to say, the current retail environment continues to be competitive. However, it's changing rapidly. As a result of that, our customers are taking Excuse me. Sorry. An omni-channel approach to finding a way to connect with the customer, so they can be everywhere where the consumer is. Really an interconnected experience, if you will, across mobile, digital, and in-store. We're leveraging our apps like My Lawn and Gro to support these interconnected touchpoints. We can provide inspiration, how-tos, and expanded video content, so we can be everywhere the consumer wants to be. At retailer, productivity and collaboration is imperative in today's changing retail environment.
Working with retail partners to achieve shared efficiencies in our supply chain network, as you heard from Randy Coleman. We also continue to have a product assortment so that our customers have the right product and the right placement at the right time. You've heard numerous people talk about solution selling, so I won't beat a dead horse, but I will tell you how we support that at the retail level.
It's really about a couple of things. Number 1 is that what makes us successful is having the people to be able to support these solutions, us have the products, and us have the experience and know-how to make it come to life. I think you'll find that when we go into the stores, you'll see the opportunity firsthand of what these solution centers look like. From a retailer partnership standpoint, I think it's really about top-to-top relationships. What you'll find is that we've created top-to-top relationships with all of our key customers. We get together one-on-one on a quarterly basis, and we align our strategic initiatives and have joint business plans to ensure that we grow together. As a matter of fact, this Friday, we actually have a top-to-top with the largest customer in Marysville.
From a live promotional standpoint, you heard Mike Lukemire talk a little bit about the fact that we are now working much closely with our marketing and media partners, with all of our customers, and as a result of that, you'll find that we will have more impactful promotions that are synergistic, and ultimately, promotions that give us a bigger POS lift. At the field sales team level, continues to be one of our biggest assets, and they really are, and continue to play a critical role in us being successful as they create a frontline sales force that integrates and, excuse me, communicates with both the consumer and our customers. I think you'll realize here, though, is that we will get the full realization this year of our integration with Bonnie. We currently had, last year, about 2,500 people at retail.
This year, we are adding the Bonnie sales force into ours. That gives us over 3,100 retail presence during the course of the season. That's a 25% increase over last year. What that does for us, obviously, other than just gives us scale, is gives us the opportunity to, instead of fighting for display space, to collaborate with Bonnie, to work together to give us a bigger share of the store. That's a huge competitive advantage for us. I think it's actually coming back to merchandising in the store. It's really about key decision-making relationships. Scotts Miracle-Gro has the best one in lawn and garden, and I'd argue that maybe in the entire industry. The bottom line is that we do regional operation plans with our key customers at store level, and we talk about the strategic initiatives that we want to accomplish.
Secondly, what we do is we talk about regional opportunities. Some examples of that are the La Niña effects that are happening in the West and the South right now, or the opportunities in the Northeast and the Mid-South on drought recovery. Lastly, it's really about growth. It's about growing the category, most importantly, growing all of our customers, not just some. We've had conversations with virtually every one of our customers, they all tell us the same thing, it's pretty straightforward. They cannot grow their lawn and garden category if they don't grow their Scotts business faster than their store average. That's exactly what our objective for North American sales for 2017 is. I'm optimistic by nature. I'm a sales guy. I've been doing this a long time.
I'm not here to make predictions or projections, I will tell you, I really like the vibe that's happening at retail right now, both with the retailer and with our customers. I think you'll find the same thing when you go out there. There's an energy that's out there we haven't seen in the last couple of years. The bottom line is we've obviously started off strong. I don't think that's coincidental. Again, I won't make a prediction, I'll tell you that I'm pretty excited about what's going to happen, I think you'll see firsthand what I'm talking about. With that, I'd like to turn it over to Jim King.
Thanks, Mike. We're running a little bit early, we're going to do some rapid-fire Q&A here in a second. Before we start that, I'll just put my own top spin on what you all heard this morning, because I talk to all of you on a daily basis and have been for more than 15 years now that I've been at Scotts. I think somebody, Randy and I were out doing some marketing last year, somebody asked how it was that we could all of a sudden make the changes that we've made and move so quickly. Jim's talked about the changes to the management team and the streamlining of the business. Our honest response to people when they ask us is that we've really evolved the culture of this company in a very short period of time.
I think what I shared with some of my colleagues yesterday, which may have been lost on them, for this audience, is the speed at which things are changing now is really different than what you heard and saw from this company a few years ago. When we did the Roundup deal a couple of years ago, I guess a year and a half ago, we had that step change in the profitability of the business, we told folks that what we were hoping to do is bring new products to market by 2019. We did that in a year. The new hydro system, we did that in a year. The Bonnie agreement, we've done that in less than a year.
The changes that are happening in the organization and the speed, I think is really different, and the story's much different than what I've shared with many of you for 15 years now. That's my top spin on what you've heard. I'm really optimistic about the things that we're doing. What we're going to do is we're going to take a little bit of Q&A with Jim before he leaves. There he is. We're going to try to do something just rapid fire for about 10 minutes, then he's going to go out on the bus that's going to go to The Home Depot and stay there. Everybody will have an opportunity to interact with him there. Let's take a few questions.
Can I borrow a mic too? All right. Thank you. Hey, Chris, before we start, I just want to say that I've been doing this for a bunch of years. I usually interrupt like a son of a bitch. I think this was one where it was really fun just watching the team. I don't know, for a lot of folks, Barrett is one of them, who've been following us for a long time. This was a really good presentation that sort of talked about where we're going as a company, and the excitement is not bullshit. It's for real. There's a lot of really good stuff happening. I think there's the team itself. If you go to Marysville, and we have a team that if you looked at our business sort of 10 years ago and today, it's younger, and it's more diverse.
I say that only because the business is being run by some women, but a lot of guys. You go back to Marysville. Marysville is a much younger place for us now. It is a lot more ladies, and different skin colors, the whole bullshit. Michelle Rhee is on our board. She should have taken the education job, I think, but she didn't listen to me. She runs comp and workforce, and one of her things is, Jim, diversity is not just a skin color issue. Diversity, it's experiences and how people think about things. Behind all these presentations, there is a much younger crew that you're not seeing. I would say anybody who wants to come visit should do that because it's a pretty interesting and different company than we were 10 years ago.
I'm really proud of the work that everybody did here. Thank you guys, all.
Just two questions on hydro. I guess first I'm trying to put the Hawthorne growth into perspective. How fast is the expert portion of that category growing, if there is an industry growth rate at this point? How do you see it evolving between consumer versus commercial? If it goes more toward commercial, how brand oriented are those growers versus a consumer? Thanks.
I'm going to trip around on this one a little bit. This is, let's just call it category growth rates. I think that the numbers, if you looked at it over the last couple of years, they'd start with a two. I view this market as a little bit like when you saw the U.S. consumer market consolidating around The Home Depot, Lowe's, and Walmart. It was a lot of time, if you weren't growing 30% with those guys, you were definitely losing share. I think we view, and I wanted to really talk about this, and I sort of kick myself for not having mentioned it. If you look at what we're talking about, and I think we're trying to be conservative here. All right? I think on our core, I think our view is we want to grow more than 2%. Okay?
Below 2% on the core, we'd be disappointed. I think we've got a good year going, by the way. I think we can do better, and I think the stuff that we talked about says that. I think if you look at live goods, I think we'd say 5%-10% is what we ought to be getting. I think Tomcat is a brand where I think that would be a start with a two. That's how that category is growing. Then hydro, we're trying to come up. Mike and I, this is one where we're not trying to put a lot of pressure on Chris's business. I start with simple math, okay? Say is everything that's occurring in this country, positive, negative, or neutral, okay? Definitely on this space, it's positive, okay? I'd start with that.
We don't want to put too much pressure on Chris's business because we started with a business case, which is how we did our acquisition economics. That is very conservative, okay? Chris's unit has outperformed not only those numbers, but Chris's unit has also outperformed their budget, okay? From our point of view, we've talked to you guys a lot about do not overpromise, okay? We're not going to do that here. Mike and I were talking yesterday, just because it seems like with the analyst community and maybe just the investor community, but I'll start with the analyst community. We can't get you all to shut the fuck up on this issue. It means we were not probably communicating properly. I'll take that on ourselves.
What number would we say if we are not growing at a level, we would be disappointed? Okay. I think where Mike and I got to, and the consolidated number we had, mine was lower than Mike's, is if we're not growing at 15% on this base, we're disappointed. Okay. On a per year basis. I think that's one that we're willing because we kind of went around the room yesterday and said, "What can we share with these guys where we're not putting Chris in a box where he creates a disappointment?" Okay. Because there's no reason for that. Okay. I thought it was a good presentation, by the way, because it kind of says the journey we're on right now.
The place we are right now is we have a few more targets we're looking at, we have a big integration task ahead of us, okay. A positive environment, external positive. We don't want to put him in a place where you guys are saying to us, "Fuck. That's not what you said." We sat around yesterday and said, "Okay, what would be a number that if we couldn't grow that level, we'd be disappointed?" We did it, how do we feel about it in the Live Goods space? How do we feel about it in our core space? How do we feel about it in the Hydro space? That's the number that we sort of came up with a consensus. I think it is worthwhile guidance for you.
Mike's number was higher, I think what we're effectively not trying to do is succeed but somehow feel like we're screwing up because within the deals, virtually every one of these deals we've done has had a performance payout to the preexisting owners. You don't get really smooth numbers where you have people who get paid a bunch more money if they make a certain number. They're going to make those numbers. Chris has been making his numbers in spite of the fact that a lot of these numbers come up at year-end. You're not going to get super smoothness. Not only what he described, but there's also earn-outs. The earn-outs then drive performance into sort of calendar periods that work for the seller that are somewhat artificial. Okay.
What I'm saying is, I think our view is category rates north of 15% would be what we would expect on a go-forward, long-term basis. We think that's conservative.
Okay. Thanks. Maybe if you could talk a little bit about the changing retail environment. Obviously, we're seeing a lot more e-commerce. You touched a little bit upon it in, I think, the last segment. Where's e-commerce now? Where is it going? Just in terms of how you work with the brick-and-mortar retailers, thankfully, you're not in the enclosed malls, that you have the anchors that are out there, but how they have conversations with you in terms of driving that traffic, because yours is more of a touch and feel kind of category.
Well, I'd like Mike to take more of this, except I do want to go back to say we want to sell wherever people are buying. Okay? That's where our loyalty is to our consumers. That doesn't mean we're disloyal to our brick-and-mortar retailers. Lawn and garden's still within the online marketplace, except for AeroGarden and stuff like that, is still pretty immature. I do want to say, to start with, our loyalty is to our gardeners, okay? We will go wherever we have to to stay with them. I think we have these big relationships with our sort of legacy retailers. I want to tell you guys that when we merged Scotts and Miracle-Gro, Home Depot was not national. Lowe's was not national. Walmart was not national.
We all look at these retailers now and say, it doesn't seem that long ago to me because this was 1995. It was Kmart and sort of the hardware co-ops were the only national players in town. It's evolved a lot so that we have these three big retailers, which Mike and his team have done a fabulous job. Our brands are important. We're a very good partner to these guys, and we appreciate their support as well, and we're looking to drive their business and sort of the quality of their business. It's something we're very interested in, which is how is the market evolving on a sort of e-commerce point of view. Mike, you want to take that?
Yeah. We're working with all the retailers on whether we want to drop ship or put it in their warehouses. Because of the distribution, we almost have to drop ship. We have to develop the network with the retailers that no matter what retailer or whether we ship it directly ourselves, it comes out of our factories or our warehouses, and we'll sell online with anybody. We're doing it with Amazon, Depot, Lowe's, Walmart, and we even ship some stuff through our AeroGarden business ourselves. We'll just continue to evolve that. Think about all the content that has to go into that. Who has the most content? Who has the most knowledge? Who has the most expertise? That's a couple months.
We want consumers to get the products however they want them, we'll work through with whatever venue allow them to get that and have the information. Our big retailers are into it big time. Years ago, they would be upset that we would do that, but we actually have to have the infrastructure to do it, or they won't be able to do it.
Yeah. I would just add one more into that, which is that it is not the threatening environment that they used to be, where they would act like they'd kill you if you went on Amazon. That is not the issue. I think they're very much I'm not going to say even struggling. I think trying to figure out how, start with Depot, how they can use their store infrastructure, their distribution infrastructure, their relationship with the consumers to participate in a more convenient way of getting products. I think everybody's just trying to figure it out. I think the good news for us is it's not super mature, so we're not all behind on this. I think it starts with saying our loyalty has to be with our end consumer.
Just on this idea of solution, solving a solution for the customer, improving the in-store experience with better merchandising, putting the location of different products into one area, how are retailers responding to that? Because sometimes the retailers want the customers to be able to work through the store, purchase different products, now they're going to have all the solutions in one space. It seems to me that while retailers are certainly going to-
You should ask a harder question. It's a good question in that I would look at lawn and garden retailing and say, if you want to look at sort of a merchandising approach that's stuck in concrete, I'd go to a lawn and garden department. Okay. One of the questions, which I think drives the genesis of the question is, why has it taken them so long? The answer is they're very interested in the experience. I think this was one of the opportunities of the testing we do with Black Magic at Depot. They're looking for a different experience. I was at one of our retailers, and they said, "Look, man, we need you guys to be more agile.
We want to try lots of different merchandising approaches." I said, "Where do you see this kind of experience?" This is Depot, they said, "IKEA." This is where we want specialty, kind of weird sections that are branded, and that's a whole different outlook. I would say all the retailers, at least the major retailers, are very interested in the experience, and that I think this I've told you the guys that I went to visit Frank Blake before he retired. He called me down there, and he was worried, and he said, "I just can't support this equity at sort of growing our business at 2%. I need 4% growth to sort of justify our equity, and I'm worried about how we're going to do it, and how can we work together to have sort of GDP plus a couple," call it.
I think they're all thinking that way, which is if they're going to get GDP plus a couple, it is not going to be the way it's been done before. You just can't go to a lawn and garden department and say it's not kind of stale. It is. It looks kind of like going to Kmart 20 years ago. I think there's a lot of room for improvement, we've talked about it. They've talked about it. We haven't done much about it.
I think there are folks like Mike and Mike's whole staff on the retail side that are very interested in doing this and recognize that if they're going to, especially when you're dealing with online competition, you're going to have to change the experience and provide that sort of Project Focus, which is go in and you say to yourself, you do that, then you do that, then you do that, and it's hard the way it is today. I don't know. Mike, would you add anything on that?
Most of the tests we're running, you can think about it, are not adding any more brick and mortar, but they want to increase their sales by 5%-10%, this experience actually increases the market basket. You're going to tie in online and solution selling to the experience. You fill up the market basket, you make it convenient, and you utilize the same space to increase their sales. They're looking at how all that ties together.
Look, attachment rate. This is a big deal with Sutterer's business, which is you're dealing with, depending whether you're looking at nutrients or soils, between a 10% and 20% attachment rate on live goods. Think about it. Somebody's leaving with a live good, and there's a 90% to 80% chance they're leaving with nothing else. They need the other stuff. It's a pretty big failure, I think, to say 10% or 20% attachment. Those are terrible numbers, really, when you think about it.
We're going to end the Q&A for now and pick it back up when we come back. The way that we're going to move out of here, everybody on your badge, you have two numbers on the back. You're already sitting at one of the numbers. Your bus number will be on there as well. Head to one of those buses. The restrooms are out to the left if anybody wants to grab them on the way.
One thing I want to add just. I can see everybody's getting up.
For all the folks who are investors and trusting us with their money, I want to thank you major, or what would Trump say? Bigly. I want to thank you guys bigly.
Bigly
for trusting us with your dough. Thank you. We're going to do that. A couple of really simple rules. I'm saying this because my counterparts at the retailers asked me to. Some of you cover spaces in these retailers outside of lawn and garden. Please stick to lawn and garden. If you want to do a store walk later, God bless. On this, we request that you stick with us in the lawn and garden department. I'd appreciate that. We're going to move in small groups. The first stop is going to be roughly 25, 30 minutes. We're going to shift. All these stores are really close to each other. It's just a couple-minute bus ride. They'll be shorter and shorter as the morning goes on because it'll be somewhat redundant. Jim's going to stay at The Home Depot.
The other person that's going to stay at The Home Depot is Mike Sutterer. The biggest discussion on Bonnie will happen there. You'll see that display there. With that, let's just move outside. If you're listening on webcast, probably around 12:30, we'll be back online. I think so. It's three days a week. Yeah, that's right. Mike Milman? I can't remember the other one.
Still guilty. I think they're guilty. That might turn over on Mike. I'm just saying.
What?
I'm just saying.
Right. That's certain
Offer to change the strategy, but you got to.
You ready, Randy?
Sell them on it.
All right, we're going to start a Q&A session. Are we back online?
We're back on the webcast. Even though it's a pretty intimate crowd and we can probably all hear each other here, if people have questions, if we can get a stick mic to them so we can hear it on the webcast, that would be great. Do you want to start? We'll start with the person who came in just for Q&A, William Chappell. No wonder he's asking a lot of questions.
Thanks. Maybe talk a little bit about how you're thinking about commodities, not just for this year, but the next two, three years, and is there any changes? Going back, I guess it was four or five years ago, there was a thought on a big gross margin push.
We're going to completely change our supply chain and get 200, 300 basis points of margin improvement. That was kind of scrapped. Has there been ever a revisit? Are there real meaningful ways to improve, both from a commodity standpoint, from a supply chain standpoint, the gross margin side, or is this just kind of a 250 basis points here or there each year? Just trying to understand the big picture or if it's even thought about over the long term.
Sure. Luke, why don't I start and then you can add color?
Yeah.
Pretty well. I'd say last year, Bill, we made a dramatic improvement in gross margin rate. I think we're up 170 basis points, I believe, something like that. We plan to see more margin accretion again this year, and we expect to continue to see that over time. We talk about our 18% operating margin rate. A lot of that's going to come from gross margin improvement. There's a little bit of work we can still do around SG&A, but for the most part, to get from where we are, assume divestiture, and then, two or three years down the road of continued gross margin improvement, we still think we can get to that 18% operating margin rate. A lot of it's going to be built around gross margin improvement, pricing here and there as necessary.
We do know certain commodities are starting to move up. We're already buying like we typically do for next year. We're in a good place. We have a long track record of being able to take pricing, continue to improve gross margins, and that's very much a part of our plan.
It depends by category. Where we compete, what we need to do, a lot of new innovation is helping our margin. Just to follow up, is all innovation expected to be gross margin accretive for that category? Most is not going to be gross margin accretive. It's accretive this year.
Yeah. As a rule of thumb, yes. I want to say never say never say always.
Yeah.
Very more often than not, yes, that's true.
Everything I've seen is, I would say yes, but I don't want to say that and then turn around and say, "Well, is that accretive or not?
Go ahead. Good job, Bill.
Maybe if we're just continuing on the whole margin front, maybe if we could talk a little bit about selling expenses.
Just trying to think about, when we were going through the stores, we saw some of the kiosks and that component there. We've been hearing about Bonnie's and some of the people who are there that will probably help on the selling side. What's the optimal level of selling expense during the peak season? How do you measure the return that you're getting on it, and what's the right amount to have? Do you need more investments? Maybe if you could just talk a little bit about that concept.
Sure. We've done tests over many years of trying to figure out if we do invest more in selling and merchandising, will we get a payback for that? Some cases, we can do that, certain geographies on the right weekend, when business is going crazy. We tested A stores and think we make them better. Can we test C stores and move them up? It's difficult to get a good return on that. The way that we think about it more at this point is just a strategic advantage, a competitive advantage that we want to maintain what we have. Invest more, make sure we're not slipping back. Do you think we can do a surge in that particular area and get a big return from it? We haven't been able to prove that out.
Like I think Carbonara said this morning, 25% increase in seat in the store.
In store.
Right. It's a terrific competitive advantage in the way that we're incenting the Bonnie people on Miracle-Gro results and Scotts results and vice versa. Now they're collaborating, working together in the store instead of trying to take space from each other. In that regard, I think it's an excellent move.
Just one more. If you think about the actual floor space going into this season, can you talk about where maybe you've done some more incremental shelf space and then the changes you've made in terms of the purchasing ability of your customers, bringing things closer together, so making it easier. Can you just maybe talk a little bit about that? Did the retailers give more shelf space in general? I know it's different retailer by retailer.
Were you getting the incremental space? Did some of your competitors lose some? Anything that you can say that you want to say over a webcast.
Sure.
It's all over the board. I would say for the most part, we gained a lot more space by selling solutions, we get the number one end cap at The Home Depot. We didn't have that last year. That's like a home run. The Bonnie Plants and the cross-merchandising is certainly in every retailer has been a big push. I go through and even went into The Home Depot. I had almost all the displays except one. I want them all. I would say in general, I'd say we are up this year. We evaluate that and we can add-
You know share losses and gains as the season starts. It's almost predictable.
Where it's a little more difficult to measure is on the floor and-
Right
where we've seen big benefits are what Mike was talking about with projects and cross-merchandising and retailers being able to bundle our products with live goods and so on. Very much the Bonnie model, but even taking it to the Nth degree, I think in areas like that, we're definitely gaining.
Just a quick one on the supply chain. You talked about that this morning and trying to optimize that. Supply chain for Scotts has always been a major differentiator between you and your competitors. I guess, is there a balance between leveraging third parties, co-packers, et cetera, and losing control over that supply chain over time?
We only use co-packers as a capital play. We don't lose control over what they make. We're not really giving up control, it's just better asset utilization. Look at it as incremental to the space, but it's not losing any control.
Okay. Secondly, more of a question for you, Mike, I asked Jim this earlier, but you and Jim have both alluded to doing better than 1%-3% this year on the core business. It seems like the upside, if there is any upside, would come from POS or would be more market share driven.
I think it's both. I think with that Roundup selective weed, we expect huge market share gain. Tim's a little more tepid on his, but his number's pretty large. It'll show up in POS and definitely market share. I would say right now all boats are rising. Lawns. We had a really good fall program, and what we're banking on, because that was the first solution selling initiative we had. It's the first time we ever outgrew the store average, and that was in a fall program. Indicators now is we're outgrowing the store average, because if you're outgrowing the store average, you also get incremental space in the retail market. That is really what we're trying to accomplish with putting all this together is, you do that, and for years they'd say, "Well, it's a seasonal business. You can't do that." We're seeing the effects of that.
One quarter doesn't make a trend, indicators so far is we're doing the right things, we're going to continue. We don't think we're even close to being where we want to be. The early trends, I'm really optimistic. I have to be out. He has to control what I say. I'm not putting my number out here.
The fourth everything.
I have a much higher number. If you look at store averages from retail, you know what I'm targeting above the store average.
What's that number, exactly?
You don't know.
Go ahead.
Sort of a broad-based question, related to the outlook on cash flow and the increased focus there. Talking to Mike Carbonara earlier on how has the retail environment changed with respect to inventory levels? We saw it throughout last year, there was a push towards tighter inventory levels at retail, that's normalized over the course of the year, there's also been a bigger focus on inventory as a part of cash flow and working capital. Does the changing retail environment impact your ability to achieve the cash flow numbers that you put out there? Related to that, how the various components of your cash flow outlook, I know you talked about growth, aligning short- and long-term incentives to pay with cash flow, how do all these contribute to your outyear targets?
Is most of it going to come from working capital? Is most of it going to come from growth? I realize this is a long question, lastly, how are you incentivizing people to drive cash flow, how deep in the organization does that even go, right? I imagine the sales folks are thinking about different outcomes.
Maybe I'll take those in reverse order. Sales plan is for the people in the field, POS based and shipment based both. There's a little bit of an earnings component, I'd venture 25% at this point. For the management people that have management on a plan, historically, it's been 100% EBITDA for the last few years. This year it'll be 75 EBITDA on 25% cash flow. The long-term plan is two-thirds cash flow and one-third what we call a calculated investor return. That's essentially a proxy for TSR. That's the way people are paid. Your question about the growth over time and cash flow, most of it's going to be earnings based. We feel like we continue the track record we've had. Back to Bill's question, gross margin rate will help operating rate, and we'll see benefits from that.
Beyond that, inventory, we know we can get better. We've actually seen our turns get worse the last couple of years versus where they were a few years ago. We're already seeing great improvement this year without any concerns about missing shipments or keeping retailers supplied at all. Retailers are like us in that they're gross margin focused and inventory focused. On that end, the latest inventory at retail, and these are all averages, it's about flat, even though POS was up 7% first quarter. A small quarter, able to keep up, and we were able to make retailers as clean as possible exiting last fall. We're clean and ready to go into the spring. No real concerns there about it being a drag on our shipments.
In fact, one thing we've done differently going forward, just with that concern in mind, is a lot of our trade programs are based now on shipment growth rather than POS growth, just to address that concern. If retailers are going to de-load, we need to make sure we're going to get paid too. That's a change we actually made for this year.
That's going to a true partnership
Extracting one for the other. For all, we're worried about inventory, the programs. We get paid in shipments. We have to pay our programs out in shipments. They're really linked much more than they used to be. Chris, I think I hit every one of those points. All right.
Randy, in developing the long-term incentive program, two-thirds cash flow focused, how did you arrive at that to focus on that metric as opposed to, for example, return on invested capital or something more return-driven, which on occasion the company has focused on in the past?
Right. We bounced around a little bit. I think it was 75/25, 50/50. We came to what I think is an appropriate split because, again, Project Focus, a lot of it's about how we're going to use our cash, we need to generate more to achieve our objectives and repurchase as many shares as we can over, Jim will say 10 years, and we have a plan in place for five years. I think it's an area that we just neglected over time. It was pretty easy to get the board and comp and work committee on board that that was the right kind of metric to use, and it didn't require an incredible amount of persuasion to get everybody on board on that one. Bill.
Just one on customers, which I wish Jim was still here, he'd answer more forthcomingly. If you look at the past three, four, five years, it always seems like season's going great, and then your one large mass customer pulls you back down to earth, and it never seems to outperform, never even seems to be in line with the category growth. I guess, where are we in that cycle? Are they getting better? Is there a chance, or is it that's the way it works, it's a The Home Depot, Lowe's market, and the others will go as they go?
I'm optimistic. I think they changed their strategy, and I think we're coming out of that, and I think we'll be fine. I think the programs are great. I think we have a lot of wins there. They cleaned out their barns. They discounted. POS was not really what people thought it was. Units were actually up. The adjustment in the strategy, I think is they're headed in the right direction. I think it'll show. I'm optimistic about where they're at.
I guess in particular, staffing and inventory were always the issues you think from both cases.
I think they're staffed up in their stores. They've cut their headquarters, I think, in a lot. There's several retailers that are cutting their headquarters and putting more people in the stores. I would say that that's happening across a lot of retailers. Store service matters. I would say my head of Walmart here, anything I'm missing there? No, sir. We're on track with our plan year to date. Correct. We're on track with our plan year to date. I'll pay you for saying that, too. Anybody over here? Anybody else? Going once, going twice. Too late. Thank you, everyone. Couple little things. Knowing that most of you are getting on airplanes going somewhere, trying to get some gift bag that has fertilizer or something through TSA is not an optimal way to try to go home.
I think Heather's got everybody's contact information and mailing address. You should be getting an AeroGarden gardening kit sent to you, so it's a fantastic device. I think we all use them. Go home, grow some lettuce or herbs or whatever you grow. If you don't want to grow, give it to somebody who does. Other than that, thanks for attending. I also want to just thank all of my colleagues for their help today. I think the presentations that they put together were great, and the work in the store obviously was on display for everybody to see. This is the peak of the year, and we're trying to run a business here, and I'm being disruptive and trying to have an investor day. I appreciate all of the sacrifice that they've made. They did a great job. Thank you all for attending.
If you ever need anything else, just you know where to find me and give me a call direct. Thanks.