Earnings Call Transcript - SMG Q4 2020

Operator, Operator

Good day, and welcome to The Scotts Miracle-Gro Company's Fourth Quarter Earnings Conference Call. At this time, I would like to turn the call over to James King. Please go ahead.

Operator, Operator

Thank you, operator. Good morning, everyone, and welcome to The Scotts Miracle-Gro Fourth Quarter Conference Call. We're going to modify the structure of the call this morning, so let me set your expectations. I'm here today with Jim Hagedorn, our CEO; Randy Coleman, our CFO; as well as President and Chief Operating Officer, Mike Lukemire; Chief Marketing Officer, Josh Peoples; and Hawthorne General Manager, Chris Hagedorn. We've got a lot to cover this morning. Randy will go through the numbers and provide some clarity around the guidance we outlined in this morning's press release. Then Jim, Josh, and Chris will share their thoughts, mostly about the opportunity we see going forward in fiscal '21. At that point, we'll open the call for your questions. I respectfully ask that all of you participate in the Q&A, ask one question and one follow-up. I'm glad to set up time later today or tomorrow for anyone who has additional questions. I want to remind everyone that we will be making forward-looking statements this morning, so our actual results could differ materially due to a variety of risk factors. Those risks are highlighted in our press release this morning and explained more extensively in our Form 10-K, which is filed with the Securities and Exchange Commission. I also want to remind you that this call is being recorded. An archived version of the call will be made available on our website, investor.scotts.com. With that, let's get going, and I'll now turn things over to Jim Hagedorn for some opening remarks. Jim?

James Hagedorn, CEO

Thanks, Jim, and good morning, everyone. As you saw in our release, we capped off our record-setting 2020 results with a strong finish across the board in the fourth quarter. For both the quarter and the full year, we saw growth in every category of both the U.S. Consumer business and Hawthorne. We also announced this morning our plans to increase our existing 25% financial stake in Bonnie Plants through a 50-50 joint venture with its current owner, Alabama Farmers Co-op. I don't want this news to get lost in the headlines around our financial performance for 2020 and our guidance for next year. We see live goods as an essential part of our long-term strategy, and having a more significant stake in Bonnie is the right place to start. I'll elaborate on this point later in my remarks. I know most of you want to focus today on our outlook for fiscal '21. Frankly, that's our focus as well and where I want to spend most of my time. Our EPS guidance, which projects 10% to 16% growth in 2021, demonstrates we're in a good place entering the year. We're going to handle things a little differently this morning, so that my comments have some better context. I'm going to turn the call over to Randy now. He'll walk through a few highlights for 2020 and then provide some of the details for our fiscal '21 outlook. Then I'll come back and share the remainder of my time with some of my colleagues, so you have a better sense of our vision for the business as we enter fiscal '21.

Thomas Coleman, CFO

Thanks, Jim, and hello, everyone. As you know, we essentially pre-released our 2020 results that you expect, and we said we expected to finish at about $7.25 per share for the year. Given our prior detailed communications earlier this year, I won't be walking through the specifics of the P&L at this time as I normally do, however, I do want to share a few thoughts and highlight some key points. Starting with sales, I've never seen growth in my 22 years here like we had in Q4. In the Consumer business, POS growth was 38% in the quarter. And as Jim said, the growth was everywhere. The other thing that was happening, though, is that retailers were working to rebuild depleted inventory levels, and that was what drove the 90% growth in shipments. We ended the year with retail inventory about 15% higher than a year ago, but also with customers continuing to buy aggressively into October and planning for a big early spring. Full year sales in U.S. Consumer increased 24%, driven by POS growth of a similar number. Gardening is the big driver; we did see a 45% increase in consumer purchases of branded soils and 30% in plant food. Insect control products were up 51%, weed control was up 16%, grafting 31%, and lawn fertilizer 11%. At Hawthorne, the story was pretty much the same as it has been. Chris is going to share some of the details in a few minutes, so I won't go into them right now. But I will tell you that September was our largest sales month ever for Hawthorne. And it was encouraging to see that Hawthorne translated higher-than-expected growth for the year into higher-than-expected profitability rates, too. On the gross margin line, Hawthorne improved 240 basis points due to fixed cost leverage, favorable brand mix, and pricing. The segment margin for Hawthorne improved about 300 basis points to 11% for the full year. This was ahead of our initial expectations, and more importantly, keeps us on track for a segment margin goal of 15% in the next few years. By the way, the U.S. Consumer business posted an 80 basis point improvement in gross margin rate for a lot of the same reasons that drove the Hawthorne rate higher. You'll notice though that the company-wide rate is up only 50 basis points due to the faster growth at Hawthorne, where the overall gross margin rate is approximately 10 percentage points lower than the corporate average. Nevertheless, we are extremely pleased with what we saw. SG&A was up 47% in the quarter and 26% for the full year. The biggest driver was variable compensation, which was approximately $80 million higher than a year ago, but SG&A also increased due to media, marketing, selling, long-term comp, and charitable giving. Interest expense benefited from lower debt levels and lower interest rates, which is $5 million lower in Q4 and $22 million lower for the full year. And we finished the year with leverage at 2.5x average net debt-to-EBITDA. This is about a full turn lower than our target leverage and 2 turns lower than the maximum permitted under our debt covenants. So we enter 2021 with tremendous flexibility to invest in the business while also returning more cash to shareholders. Turning to cash flow for just a moment. You may recall that I said after Q3 that free cash flow would come in around $400 million for the year because we wanted to build inventory. Instead, product was going out the door as soon as we built it because retailers were looking to replenish their own depleted stock. So our free cash flow came in about $100 million higher at $495 million, meaning we still have work to do in terms of building inventory next year. I'm glad to answer any question you have about Q4 or our full year results, but I doubt there are many surprises in what we announced today. So I want to provide some detail for our '21 guidance and set the stage for Jim to explain our outlook from a more strategic perspective. We have always prided ourselves on being transparent with shareholders. So let me just start there. We expect to see enormous sales growth in Q1 from both major segments that will have growth rates similar to Q4 and probably even higher. We will also likely be pacing well above our full year target through Q2 given Hawthorne's momentum and U.S. retailer plans for a big spring. However, our visibility is much less clear after Q2 for obvious reasons. In addition, our Q3 and Q4 comps are huge. For example, second half growth for Hawthorne in fiscal 2020 was 69%; and from May through September, our POS comp in the U.S. Consumer business was 43%. As you'll hear from Jim and Josh Peoples, we believe full year growth in the U.S. Consumer business is still possible even with that reality. I'll let them explain why. But if we simply hold the U.S. Consumer number flat and Hawthorne grows at 20%, we would expect to earn roughly $8.40 per share. If the U.S. business were to decline by 5 points and Hawthorne grew to 15%, earnings would be roughly $8 a share, which would still be a double-digit increase versus 2020. We currently see gross margins declining roughly 50 basis points which is different from what I indicated on our most recent public comments about 2 months ago. As we have finalized our plans for the year, however, it became clear that we need to further increase our investment in warehousing for both businesses to get inventory levels to where we want them. And like other companies, we're starting to see the potential in the recent weeks for more commodity pressure, especially from resin. Note the total company rate decline assumes about flat rates in both businesses, but a negative impact from segment mix, consistent with what happened in 2020 with Hawthorne's dramatic sales growth. And know also that we are hedged on our key commodities, urea, fuel, and resin at about a 65% level, similar to our normal historic approach. SG&A will likely decline 6% to 11%. Our guidance assumes variable compensation will be about $80 million level for the year, with some of those dollars being offset by a higher level of planned investments in marketing and our direct-to-consumer efforts. Free cash flow, defined as operating cash flow minus capital expenditures, is expected to be about $325 million. We expect a step-up of CapEx in fiscal '21 to roughly $100 million and perhaps more. And I would expect working capital to be a use of cash during the year as we work to get inventory levels back to where we want them. Finally, we will be paying much larger bonuses based on 2020 results, and this creates another cash headwind in 2021. As you've heard from several other companies, this is a tough environment to provide guidance. Our preference is to continue providing a range of what we see as likely outcomes, but it's not easy. In fact, you could argue that 2021 could be even more volatile than 2020. So the range to our guidance range for EPS is wider this year to reflect this uncertainty and also the fact that earnings base is much higher versus this year. I'll remind everyone that we had adjusted EPS at $4.47 in 2019. The low end of our fiscal 2021 range would suggest a roughly 80% increase in earnings and $800 million of free cash flow over a 2-year period. In fact, since the start of Project Focus in December 2015, total shareholder return has increased approximately 160%, we've generated over $1.5 billion of cumulative free cash flow. Regarding our Bonnie announcement, we are not yet including ranges from this transaction in our guidance, but we will update you once the deal is closed. The additional investment and the nature of our JV will result in different P&L geographies than we used in the past, and we'll provide clarity on this when the time comes. You will hear throughout the balance of the call from Jim and members of the operating team that we're striving to do even better. If that proves to be true, we'll change our guidance. But at this point, trying to estimate the timing and impact of the global events on our business is impossible. Regardless, even if our current P&L estimates prove accurate, it will be another year of record results for our shareholders. So with that, Jim, back to you.

James Hagedorn, CEO

Thanks, Randy. Before I expand on Randy's comment, I want to provide some of my own thoughts about why I believe our business is so well positioned right now. And it goes well beyond COVID-19 and the way it changed consumer behavior. During our second quarter call, I told you about a saying that hangs above my office store, something I've learned from my dad. Luck is where preparation and opportunity meet. Five years ago, we began a transformation of this company through an effort we called Project Focus. We divested businesses we didn't believe could drive shareholder value. We invested in new categories that had a higher growth rate with brands like Tomcat and Bonnie Plants. We also invested in an entirely new business with the creation of Hawthorne. We just crossed the $1 billion sales threshold with Hawthorne and have begun to exceed the financial targets we set in our business plan when we started down this path. It has quickly become a business that is critical to our future. The benefit of Project Focus that too often gets overlooked, however, is what we did to improve our core U.S. Consumer segment. We dedicated ourselves to ensuring our brands remained relevant in a rapidly evolving marketplace. Without those efforts, the results this year would not have been possible. We changed our approach to R&D, which quickly led in rapid succession to the introduction of our most successful new product launches ever. Miracle-Gro Performance Organics, Scotts Turf Builder Triple Action, and Ortho GroundClear. All of them were new product home runs. We began overhauling our approach to marketing. Spending behind our brands has increased 40% over the past 2 years. We also brought new agency partners to the table to help us reimagine our relationship with consumers. Project Focus has been about hard work and preparation, and fiscal 2020 presented us with the opportunity to exploit that preparation. Not only did we do so, but we positioned ourselves for continued success. And so as we look to fiscal '21, we believe there is more work to do and more growth to capture. While we remain bullish about our strategy and our future, we are taking a prudent approach in setting expectations. I told you on our last call I would be satisfied if we simply held on to the growth of our U.S. Consumer business and protected our margins, and that remains the case. The real question is whether we can do better than that. Specifically, do we believe the consumer business can grow in '21? And the answer is yes. Our marketers believe that. Our sales force believes that. Our direct-to-consumer team believes it, and our retail partners believe it, too. So we'll incentivize all of them to deliver that growth. And as we demonstrated throughout 2020, we have the ability to lean into higher sales, and we'll be positioned to do so if we see they're achievable. There are legitimate reasons for the optimism. For starters, the momentum we've seen in the second half of the year has yet to slow down. We also know we left sales on the table over the last 2 quarters, probably $200 million in U.S. Consumer and Hawthorne combined, just because we couldn't keep up. The competitive dynamic in the retail market could also be interesting. We expect our smaller national retail partners to fight hard next season to maintain the market share they gained in 2020. And we expect some of our larger retail partners to step up their promotional activity in 2021 to claw that share back. Remember, due to COVID, there was little ability by these larger accounts to drive foot traffic into their stores in March, April, and the first half of May. Though we're optimistic, there's no reason to guide any higher right now. Just as we did throughout 2020, we'll be as transparent as possible when we have greater clarity, and we'll adjust guidance when and if it's necessary. We're not trying to be coy. We're simply being honest. Six months ago, I never would have predicted the state of the world right now. And while we have a good line of sight for the next several months, I'm doubtful of anyone who says they can predict what the world will look like next spring and summer. That leaves an enormous gap between what is possible in '21 and what is likely. I will tell you, we share the same macro view as many other CPG companies. We believe the U.S. economy will remain sluggish for the next several quarters, and most consumers will still be in nesting mode next year. That actually should bode well for our Consumer business. But I want to be clear about my goal for the Consumer business in fiscal '21, and this is a message targeted at our long-term shareholders. I will not define success this year based simply on whether we grow. There is a more important long-term mission here, and that's the focus. The next generation of consumers came knocking on our door in 2020, millions of them. And I'm mostly talking about millennials, the largest generation in American history who are in the midst of becoming homeowners and gardeners. The goal is not simply to enjoy their company for a short visit, but to keep them with us for the rest of their lives. So we will invest heavily to build the strongest relationship with consumers we've ever had. If we also see growth for '21, great. But if we fall back a bit and still keep most of these new consumers engaged, I can live with that, too. How we accomplish that goal is a task that is in the hands of our new Chief Marketing Officer, Josh Peoples. Josh has been here more than 20 years. He's worked his way up from a junior marketer to run our lawns business and to oversee the work of all the brand teams. He's one of the most thoughtful and analytical marketers we've had here during my tenure. We're lucky to have retained him this long, and I'm confident he's the right person at the right time to serve as CMO. Josh?

Josh Peoples, CMO

Good morning, everyone. As Jim just mentioned, I've been at Scotts Miracle-Gro for 20 years now in a variety of marketing roles. I believe I've got a good sense of our business and, more importantly, the needs of our consumers. The one thing I've learned for certain over the past 2 decades is that lawn and garden consumers are different than in other categories. There is an emotional element to this space that is truly unique. Gardening is a form of self-expression that can be deeply personal. Understanding how to tap into that emotion which, by the way, is different for every consumer, is the most critical element between growing and standing still. What we've all learned more recently is that we need to take a different approach if we're going to tap into that emotion and strengthen our relationship with consumers. We can't talk about ourselves and our products like we used to. Our messages have to be focused on consumers, not us. As Jim said, we had tremendous success bringing new people into the category in 2020. About 30% of participants in edible gardening were new or lapsed users. We estimate about 8 million more people participated in lawn care than in 2019. We not only believe we can keep most of these new users engaged but bring even more people into the space. Demographics will continue to help us. Millennial homeownership will continue to swell in '21 and the years that follow. Our research indicates this group is more interested in lawn and garden activity than their parents and equally accepting of our brands. Jim mentioned the importance of innovation; I couldn't agree more. But our new product strategy has to be driven by consumer needs while being rooted in science. It's not sustainable the other way around. All the products Jim mentioned, Performance Organics, Triple Action, GroundClear, speak to the lifestyle of the millennial consumer. They have a great environmental profile and are easy to use. They also happen to deliver outstanding results. But the most important innovation for us will be how we communicate. We were forced to throw out most of our marketing plans at the break of the 2020 season and work on the fly. We learned a lot from that experience and got smarter about what works. So we entered fiscal '21 following these 3 principles: First, to be creative lead; second, to be always on; and third, to be data-driven. As we saw this past season, none of these focus areas exist in a vacuum; they exist together. As recently as just a few years ago, we would have taken months to produce a single TV commercial and ensure that everything was focus group tested. We also would have relied on just 15 or 20 creative assets to support the season. That's not what we're doing today. Instead, we're developing new creative approaches literally every day and creating thousands of them, not dozens, in the process. This means we are learning and changing every day. We are responding with real-time data that helps us understand what is resonating with consumers. We are putting increased investment behind what is working, and we are quickly walking away from what is not. Most importantly, quality is not being sacrificed. If anything, it's improved. In 2021, I would expect upwards of 75% of our advertising spend to be on digital. This will allow us to be much more precise in hitting our target audience. We will be more capable of diversifying our creative to represent different audiences and their values. A millennial couple, for example, living in the same house, planting the same garden, are likely to see 2 very different approaches, each tailored to their online activity or personal interests like cooking, entertaining, or home decor. And consumers in Chicago are likely to see different messages from those in San Francisco or Dallas or Boston. The timeliness of our messaging has also improved. If the weather is looking good in a specific city, we'll lean in hard to maximize the weekend. If it's going to be rainy, we'll pull back. If a retailer has a promotional activity we want to support, we can target the exact audience most likely to respond. We know this approach works. We see it in our data and in our results. Our retail partners are seeing it, too. That's why we'll work with all of them in 2021 to drive consumer foot traffic and category growth while also fueling online shopping. You'll see us add to our portfolio of digitally native brands, not sold at retail like Lunarly, Knock Knock, Barkyard, and Greendigs. You'll also see more focus on indoor gardening and live goods. I am confident our marketing efforts are more impactful now than at any time since I joined the company, and I am confident in our plans for the '21 season. I agree with Jim about the opportunity in 2021. We have a great opportunity to step our business for years of future growth. We're not worried about difficult comps and issues beyond our control. We're focused on the issues within our control, and I'm confident that the steps we take in '21 will benefit Scotts Miracle-Gro for years to come.

James Hagedorn, CEO

Thanks, Josh. One last point before we turn to Hawthorne. As I've mentioned earlier, we've signed a letter of intent in recent days to acquire a 50% equity stake in Bonnie Plants. This is part of a proposed JV with Alabama Farmers Co-op. Most of you know I'm a big fan of live goods; so is Mike Lukemire. It is what drives the category. Without the plant, there is no gardening. When we announced Project Focus, I said I wanted Scotts Miracle-Gro to evolve from a gardening products company to an actual gardening company, and the best place for that to happen is in edible gardening. That makes the increased stake in Bonnie an obvious choice. Like us, they've been at this for generations. They have the single most powerful brand in the space and an exceptional relationship with retailers, and consumers love them. Josh mentioned the emotional component of lawn and garden. Nowhere is that more evident than in this space. The shopping experience for fertilizer and growing media is pretty pedestrian and, frankly, not that inspiring; pick up a bag, put it in the car, take it home, spread it on the lawn or garden. But with edible plants, we're talking tomatoes, peppers, leafy greens, basil, rosemary, and a variety of other herbs and vegetables; consumers are engaged in a far different way. The shopping experience is different, more engaging. They spend far more time at the shelf looking for the perfect plant. They become invested in the purchase process, and then they go home and they nurture a plant that is going to provide for food for their families. There's an emotional connection we can make in this category, a level of trust that is critical. And we know that connection is especially strong with millennials, which is what makes Bonnie such an important strategic fit. I believe our involvement with Bonnie over the past several years has been a benefit to both companies, and I doubt you'll hear any different from them. In fact, Mike Sutterer, one of our former operators here, is now the CEO of Bonnie. He understands our vision and our goals, and we consider him an outstanding operator. So this has the makings of being a great partnership and is critical to our long-term success. We're not going to cover too many details today because we are still several weeks from actually completing the deal, but expect to hear more from us in the quarters ahead. I now want to switch gears and talk about Hawthorne. As I said earlier, we see double-digit growth as a real likelihood again next year. We have some good tailwinds in the near term and see the long-term outlook to be strong as well. Instead of going into the details myself, let me turn things over to Chris Hagedorn for a few minutes to share his view.

Christopher Hagedorn, General Manager, Hawthorne

Hey, everyone, Chris here. I'll start by simply saying that 2020 was obviously a huge year. Crossing the $1 billion mark was a big deal for the team, and I felt even better knowing that we didn't have to do anything crazy to drive that number. Honestly, I think you could add another $100 million or so to the top line this year. But our supply team was so stressed out at times that we lost some money on the table. And so we've been making investments to ensure that those stresses don't emerge again in the future. If you look at 2020, it was a great story everywhere. Within our North American Hydro business, we doubled our lighting business during the year, driven by about $100 million worth of LED lights. This was a category that didn't even exist for us 2 years ago, and it's looking like we underestimated how significant it would turn out to be. LED sales were more than 100% higher than expected going into the year, and we're selling our fixtures as fast as we can build them right now. Consumables in North America saw 49% growth in nutrients and 64% in growing media. Geographically, we saw growth in literally every market. California, our single largest market, was up 78%, but newer markets like Michigan and Oklahoma were up 133% and 203%, respectively. I also want to give a nod to the team because we finished the year with a segment margin of 11%. I expect that number to move up again next year. We're doing a good job of striking the balance of driving growth, market share, and improving our profitability. Some of you asked on the last call if we are worried about too much inventory in the channel or some degree of overcapacity. We're not seeing any signs of that right now. In fact, we expect the growth rate in the first quarter of '21 to look a lot like what we saw in Q4. There's also a good reason to be optimistic in Q2. The forecasting is a little less predictable later in the year, though. And obviously, the comps that we face in the second half will be tough. But the head start we get should allow us to deliver the 15% to 20% growth that Jim referenced earlier. The other great news for Hawthorne is what we expect from yesterday's election. Look, people are still counting votes, so I don't want to get too far ahead of myself. We expect New Jersey to approve recreational adult use of cannabis, and there's a good chance that Arizona will do the same. Going into the election, there was also good polling from South Dakota, Montana, and Mississippi. On top of that, the Governors in New York and Pennsylvania have said in recent weeks that they'll look to legalization to help them make up some of the budget deficits that have been caused by COVID-related issues. Who knows what's going to happen in D.C. We're increasingly optimistic that the federal rules will change as well, although the timeline there is likely to be longer. What's become clearer than ever this year is that we built something pretty special with Hawthorne. It's hard not to feel good about the prospects in both the near term and the long term. I do want to be clear, guys. We've seen ups and downs in this industry over the past few years. So we're not taking anything for granted. But we clearly have the best product line in the industry and the best service and supply chain, too, even with our challenges this year. Earlier this month, we finally opened our R&D facility in British Columbia, the first of its kind in the world. When we combine what we're doing there related to Canada's cultivation with our current R&D work on hemp in the U.S., I feel confident in saying we also have the best innovation program in the industry, too. So the outlook for next year is a pretty good one for Hawthorne, and we look forward to keeping you all updated as the year comes together. With that, Jim, I'll hand it back to you.

James Hagedorn, CEO

Thanks, Chris. One last thought on Hawthorne. These guys have done a tremendous job in getting the business to where we thought it could be. They've clearly established themselves as a leader in the industry, and they've shown the ability to manage complexity like the implementation this year of SAP. I want to congratulate them on how far they've come in this short period. Before we end, I just want to say one more thing. 2020 was beyond anything we could have ever expected. And I'd be remiss if I didn't take the time to thank our associates. I want to start with our field sales force as well as our manufacturing and distribution folks. These people didn't get the luxury of working from home when COVID hit. They still went to work every day. And I'd be dishonest if I didn't acknowledge they put themselves and their families at risk for the company. We provided them with premium pay and provided bonuses and additional 401(k) contributions. That's what a good company would do, though I'm not sure we can ever really thank them enough. I'm inspired by the things I've seen this year and humbled now to be entering my 20th year as CEO of this company. It feels a bit trite to say I've never felt better about where we stand, but it's true. We're in the midst of introducing an entirely new generation of consumers to our core business. We're enjoying continued success in a fast-growing category with Hawthorne. And our shareholders have benefited from the multiyear run that allowed us to more than double the value of this company in the 5 years since the introduction of Project Focus. We don't know exactly what fiscal '21 has in store. But the one thing I do know is that we have the right team in place to manage whatever happens. With that, let me open up the line so we can take your questions.

Operator, Operator

[Operator Instructions] And we'll take our first question from Joe Altobello from Raymond James.

Joseph Altobello, Analyst

I just want to go back to the roughly 8 million new lawn customers that you guys added last year. The upper end of your guidance assumed you keep pretty much all 8 million this year. And maybe a question for Josh as he is the lawn, is there a way to target those 8 million customers to keep them in the category in a period when they'll likely have more competition for their time on a weekend beyond just promotions. It sounds like you guys know roughly where they live, but do you guys actually know who they are to be able to target market to them from a digital perspective?

Josh Peoples, CMO

Great question. Yes, I mean, right now, the goal continues to be to not only retain, I would say, those 8 million, but honestly trying to bring in even more as we go into 2021. A lot of the feedback we got from consumers, even though time may become more of an issue, they definitely found lawn and garden to be a passion point that they haven't really tapped into or haven't thought it was possible. So we feel really good about not only knowing where they're at, but who they are. And I think this is where it does come into working with our retail partners to continue to keep them engaged and reaching them in new and unique ways and continue to build on really what we've done here in 2020.

James Hagedorn, CEO

Obviously, I'm a shareholder and say, like, I'm surprised like long tails weren't better. Joe, we had a lot of gardening clearly was sort of leading the pack this year. And I think we've learned enough that I think we ought to be seeing the same kind of growth in turf care. And I think our products are improving. I think we're going to have a lot more promotional support this year regardless of where COVID is at unless it's a complete lockdown.

Joseph Altobello, Analyst

And one other one for Chris, if I could. If you look at Hawthorne this year, the initial expectation was up 12% to 15%. You did 61%, so a slight over delivery, I suppose. But if you could flip that 60-plus percent growth in more context, how much of that was from the market? How much of that was market share gains and maybe what you're thinking for '21?

Christopher Hagedorn, General Manager, Hawthorne

Joe, good question, yes. So we -- as you heard for what we're expecting '21, we think there'll be continued sort of general market growth, and we certainly do intend to continue to take share. To kind of try to quantify the gains from this year, we think there's probably a solid 20% increase in consumer usage of cannabis, and that's largely anecdotal, but we quote from data sources that are available to us. So certainly it seems like stay-at-home orders and that kind of thing did increase the sort of high single-digit usage gains that we see typically in a normal year. And I think we attribute the rest of our growth to market share gain, largely driven by our ability to continue to deliver a relatively high service level. We certainly had our challenges this year, but our competition, I think, suffered even greater challenges. And then I got to give a lot of credit to our innovation team. We launched some really, really great products this year. Our LED light that we launched in Gavita was the single biggest product launch in SMG history, not just Hawthorne but the entire enterprise. And that I think is, definitely, we have to give a lot of credit to that for how we did this year.

Operator, Operator

We'll take our next question from Bill Chappell from Truist Securities.

William Chappell, Analyst

Going back to Hawthorne, I mean, just trying to understand, similar question. How tough the comps really are and how much visibility you had? I mean, Chris, I think you said you felt like you left $100 million on the table. I think by now you've had some kind of, correct me if I'm wrong, idea of how states progress once they legalize medicinal and then recreational and then revenue starts to come in. And so is it really that tough of a comp? I mean I understand March when there was kind of a surge was, but help me understand how the year really progressed, especially the back half when you have these states coming on and you [indiscernible], as you said, $100 million on the table.

James Hagedorn, CEO

Yes. Let me throw some spin on this, Bill. I think this is the year where honestly, and I think we've been hinting pretty hardcore in the recorded portion of the script, the sort of difference between kind of what we hope, and I think based on like our knowledge of business both Consumer will do and Hawthorne will do and live goods will do versus what we're kind of committing to within the range. This drives a, I think, diversity was used somewhere in the script, I think maybe by Randy, of sort of views of what we think is like could happen, what like we want to happen. And so those numbers, the operating numbers are like quite a bit different, to be honest, to -- we just don't believe we can commit to that.

Christopher Hagedorn, General Manager, Hawthorne

All that said, look, realistically, internally, yes, I'm definitely driving the team towards a more aggressive number than we had inside the building. Like Jim said, look, the back half of this past year that we just finished was unlike anything, I think, anybody in our business has ever seen before. So the idea that we're going to be able to match that is a challenge for sure. Now the remarks that we had up at the top of the call, those were prerecorded earlier this week. So now we know what happened in the election, we know how citizens voted on cannabis issues, and they voted extremely favorably across the board. And we do expect to see incremental business as a result of what happened in states like New Jersey and Arizona and others. That being said, these changes aren't going to happen overnight. What we've seen is there's typically a 12- to 18-month lag from when a state legalizes until there's any meaningful increase in business for us. So I wouldn't expect a significant amount of business as a result of those votes in this fiscal year. That looks like it will be probably more of a 2022 uptick for us.

James Hagedorn, CEO

We have been doing it for a lot, as we were looking and trying to analyze like lighting sales, and I might be off by a little bit, but you can correct me, Chris. But our high-pressure sodium lights say, HPS likes to kind of be the traditional lights that get hot and all that, I think they were up like 50%. Clearly, we had a blow away success with the innovation on LEDs. And we're trying to say where did they go? And so I think that in states that are legalizing, you're seeing build-outs occur, which I think are kind of in advance in the marketplace. And I think that's healthy for us. I think you've heard me mention and I'm a gigantic fan of Senator Sweeney in New Jersey, who sort of led that process. I don't think he legislatively could get Jersey done and he just kind of threw his hands up. And this is -- the guy is like an iron worker, okay? So big union guy, one of the few guys with a mouth louder than mine. And he has a real vision for New York or New Jersey being an important center of excellence in cultivation, and the Garden State means something to him. So I do think you're likely to see build-out occur because -- again, if we look at where these lights are going, and you say certain people are just improving the lights and go with LEDs, but there's a good bit of build-out occurring in there. And I think that build-out occurs in advance of the market, as you'd expect.

William Chappell, Analyst

One, I'll try to be quicker on the second one. But looking at your U.S. Consumer guidance, and Randy help me if I'm -- I think I'm doing this math right, I mean at the low end of your guidance, say it's down 5% in 2021, still assumes that it would be -- the revenue would be up 17%, 18% versus 2019 levels. So can you maybe help us bridge that is, I assume, like 5 points over a 2-year period of price and 12 points is volume. And so it's kind of -- assuming you get a normalize it was a 6% growth for the category over a 2-year period. Is that the right way to look at it?

Thomas Coleman, CFO

Let me try to bridge it by quarter and then first half, second half, Bill. So first quarter, like we said, it's going to be tremendous. It's going to have growth rates for the entire company, but U.S. included, it will look a lot like what we saw in Q4. Still a lot of confidence in Q2 and retailers will be building, and we expect consumers to be continually engaged, and we expect POS rates to continue like we've seen in Q4. What we expect to see in Q1, we expect that to roll through Q2. At that point, our assumption beyond that point is that to get to a minus 5% or to a nearer number for the U.S. That would assume that we're down about 1/3 or half of what we gained in the second half of 2020 on a POS basis and really begin a basis that you can argue that's really conservative because we think people are going to be continuing to work from home. I don't expect people to go back 5 days a week. And I think people who have new engagement in the category will continue to be because they have enjoyed it, and they continue to want to capitalize the investments they made this year. So the time will tell -- for us to try to speculate what's going to be going on in the world and the economy and how that applies to the U.S. lawn and garden, that's really challenging. But that's the assumption that we've made, and we want to be transparent about what the math looks like to get to that kind of guidance. So hopefully, that helps you, Bill.

Operator, Operator

We'll take our next question from William Reuter from Bank of America.

William Reuter, Analyst

Great numbers. Two questions for me. The first is you're going to be doing $800 million of free cash flow over a 2-year period. I guess what are your plans with regard to that cash flow and your leverage continues to go lower as your results have gotten better and better. I guess, what are your plans in terms of leverage targets at this point?

James Hagedorn, CEO

Randy and I think, have partnered real well on this issue. So I'll start and hand it over to Randy. This is one of the areas where I think we are completely in agreement. And as we prep for the call, we sort of figured this would come up. I think at the moment, we're pretty happy with our leverage where it's at. It gives us a lot of options. And I think I want to spend some time understanding the election results, to be honest. And what's happening with corporate tax rates, dividend, personal income tax rates, which in this company, matters, I think, to our shareholders.

William Reuter, Analyst

Can you explain the cannabis market opportunity in Jersey and Arizona, and how it compares to other states that have well-established medical user bases already?

Christopher Hagedorn, General Manager, Hawthorne

I can explain what we know of it. There's a lot of regulation obviously yet to be written in those states. So it's a little premature, I think, to give our opinion on the morning that we saw that those went positively. That being said, if you look at even just the sort of opportunity size, particularly in New Jersey, I think significant -- we expect those guys, particularly with New York and Pennsylvania not having responded yet. Number one, I do expect that New Jersey is going to be a trigger for those guys because so long particularly with the COVID budget holes that both those and all states have frankly, but those 2 as well, that they're going to let New Jersey kind of take their cannabis money. So it's an easy subway ride across the -- under the river from Manhattan into New Jersey as well, easing over from Philly into New Jersey. I think we'll see a lot of tax money flowing across that border there. Like much like you saw -- you see with a lot of states that have border states that don't have the lottery.

James Hagedorn, CEO

But I do view that market, which is a Connecticut, New York, New Jersey, Pennsylvania, just relative to the kind of West who are extremely positive.

Operator, Operator

And that does conclude our question-and-answer session. And I would like to turn the call back over to Jim King for any additional or closing remarks.

Operator, Operator

Thank you. For those people who have additional follow-ups, if you want to call our office directly, you can reach me at (937) 578-5622. Right now, we are tentatively scheduled for our Q1 results to be released on January 27. We have no kind of active IR plans between now and then. So put it on your calendar, and we hope to talk to you then. Thanks for participating today, everybody, and have a great day.