Matthew Garth: Strike two?
James Hagedorn: I don’t know.
Aimee DeLuca: Sorry, Eric.
Operator: [Operator Instructions]. And our next question comes from Joe Altavello with Raymond James.
Joseph Altobello: Thanks. Hey, guys. Good morning. Two questions, sort of clarifications, if you will; in terms of the high single digit U.S. consumer growth you’re expecting this year, what is the pricing drag that you’re baking into that?
Matthew Garth: Jim said on gross margin, it was about a third of the impact. We just mentioned where we think gross margins are going to be. But on the top line, that would have translated to down low single digits, so low single digits to me kind of says between 1% and 3%.
Joseph Altobello: And it does to me as well. Appreciate that. And maybe to follow-up on that on gross margin, I think you mentioned up over 250 basis points this year. How much visibility do you have into that, given that some of that’s coming from lower input costs, and how much of that is sort of locked in at this point?
Matthew Garth: Yeah, no, that’s a good question. So there’s a few components to that as you unpack it. We have a very good line of sight to our controllables, which what I’m going to tell you, Joe, is probably more than half. So everything that’s coming from SpringBoard, Nate mentioned supply chain. Maybe you can talk a little bit about that more, some optimizations that we’re doing across the rest of the Company. Those things are, to your words, locked in. We have about 50% of our raw material costs locked in. And from what we’ve been seeing from a raw material side, that’s usury, that’s everybody’s favorite to go to. It’s what we’re seeing is kind of three-fifths of what it was last year. So there will be a benefit. The piece that’s open is some of the volume-related elements.
At the high single digits, you’re getting all of that. And, again, the high single digits, we are saying, is coming off of a flat POS base. But the additional listings, the additional promos and merchandising that we’re getting, and the natural uplift in some of the elasticity that is dRIVing that volume will benefit our operations side and help us from a fixed-cost leverage basis. That will contribute, a little less than kind of a third of the overall piece there, so good performance and locking in the margin volume is going to help us get a chunk of it.
Operator: [Operator Instructions] And our next question comes from Andrew Carter with Stifle.
Andrew Carter: Yeah, hey, thanks. Good morning. I don’t know if you said it, and I apologize. You said high single-digit consumer sales. What are you assuming for sales in Hawthorne and other? Thanks.
Matthew Garth: Yeah, and it was kind of implied early on in my commentary, which was not obviously clear enough, which is Hawthorne has, as a few things going for it. We got to profitability at the end of the year. We stabilized revenue. We saw that in the daily rate as we made our way through the year. We have taken out a number of our distributed brands and some of our proprietary brands as we made through the year to improve the overall portfolio. That is going to drive sales down slightly, so a very low single-digit number there overall for Hawthorne. So that was the terminology of we’re not yet seeing a change in the trajectory of sales performance at Hawthorne or in the industry. But with those movements that we’ve made in the business, it will be slightly down.
Andrew Carter: Thanks. And then a second question I wanted to ask, because you said your commentary around Hawthorne is looking for a vertically integrated Company, which is interesting because you have an investment in a cannabis operator. Are you looking to do something with RIV in this instance to like de-risk the earnings profile from Hawthorne and go separate, or are you still pounding the pavement looking to add scale to Hawthorne in the hydroponic sector? Thanks.
Matthew Garth: Pound the pavement. We’re not that desperate. We’re not out street walking. Are we, Chris?
Chris Hagedorn: I wouldn’t describe it that way, no. Good morning, Andrew, by the way.
James Hagedorn: Hey, Chris. Here’s kind of where I’m at, and this is the guidance I’ve given the team. I wish we had NDAs with you guys and we could brief you. I’d actually love to get your opinion on kind of how things are forming up. But I think that I start with Hawthorne on the we can’t stay here category. Their back-end profitability, it will be a contributor. I think Chris says that we may be able to move out of mom and dad’s basement, but we’re just getting kind of a studio in kind of a ratty part of town. That has taken a lot of work, and a lot of people have suffered to get there. And there’s probably not an analyst that knows more about it than you, so the journey, you understand, has been challenging. And this idea of for us, we can’t stay here.
I think fortunately, there’s other people kind of in the same category. And the guidance that I’ve given to Chris and the team that are working this, which includes Matt, is I think the business needs to be well north of a billion dollars. It needs to be earning in sort of EBITDA terms, triple digits. It needs to be significant strategically. I mean, it has to have a sort of theme. And it’s got to be large enough to be followed. And I do think we have gotten there. And it’s not like we are – I don’t think we’re dominant. But I think when the stock was in the 200s, we thought the consumer business and the Hawthorne business were fully valued, and therefore, splitting them apart, there was no real benefit. I think today, I think there’s probably a negative valuation on Hawthorne.
I think it’s unappreciated – I mean that in the most critical sort of way – by our shareholders, at least a lot of them. And they’d like to see a solution where it’s not part of Scott’s. And so these are kind of the priorities that Chris is trying to manage.
Chris Hagedorn: Yeah, so just to build on what Jim is saying and address in as much, I think, detail as I can your question, Andrew, when we look at the options for Hawthorne, I think all of which we’re considering involve moving it outside of SMG in some fashion. There’s a bunch of options. As Jim mentioned, there are a lot of companies that have what I would consider sound fundamentals that have been victimized by just a really brutal market downturn who are also looking for partnership. Those are some companies on the hyper-equipment supply side, like Hawthorne is, and other companies that are more like RIV. And look, I’m going to be cautious just because I’m obviously an employee here at Scott’s, I’m a director over at RIV.
I think if there were an opportunity that was beneficial both to RIV shareholders and to SMG and Hawthorne, I would love to see a world where those – I’ll just look at those as sort of two elements of our kind of investment constellation in cannabis. I would love to see those bucketed under the same roof. So if the opportunity presents itself, it’s something that I think we would pursue or at least be interested in. But right now our focus is on, again, companies that we believe – I would say there’s three criteria, transactions that are beneficial and accretive to SMG and its shareholders, beneficial to the business we’ve built in Hawthorne, which is allow us to continue to pursue and support things like equipment innovation, particularly as it relates to lighting.
I think that’s an area that we have made great strides. I think the industry as a whole has benefited from that. We want to continue that. Other further-looking investments in R&D like genetics. And then ultimately something that benefits the industry. So those are the three criteria. I think there’s a lot of transactions out there that fit that bill. We’re pursuing a number of them in earnest at the moment.And as Jim said, it’s a lot of interesting stuff. I would love to share more of it with you guys. But I think we’ll have a lot more to share here over the next few months.
