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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to The Scotts Miracle-Gro Company’s Fourth Quarter Earnings Conference Call. As a reminder, today’s call is being recorded.
At this time, I would like to turn the conference over to Jim King. Please go ahead.
Good morning, all of you, and welcome to the Scotts Mircle-Gro’s fourth quarter conference call. By now, you’ve likely seen our fourth quarter and yearend press release in which we announced full year results as well as our initial guidance for fiscal 2022. We've a lot of ground to cover this morning with prepared comments from Chairman and CEO, Jim Hagedorn; CFO, Cory Miller; as well as Hawthorn Division President, Chris Hagedorn. After their comments, we'll take your questions and for the Q&A session, we'll be joined by President and COO, Mike Lukemire.
In the interest of time, we request that you ask only one question and one follow-up. I'll be available after the call and throughout the days ahead to answer any questions that we don’t have time to address or need further follow up. I want to remind everyone that our comments today will include forward-looking statements and so our actual results could differ materially from what we discuss, I'd refer you to our Form 10-K, which was filed with the Securities and Exchange Commission so that you might familiarize yourself with a full range of risk factors that could impact our results. This call is being recorded and an archived version of will be stored on the Investor Relations portion of our corporate website, scottsmiraclegro.com.
Without further delay, we'll get started and I'll turn the call over to Jim Hagedorn to begin. Jim?
Thank you, Jim and good morning. For the last month, I've been thinking about the key themes I wanted to cover today. And I also spent a lot of time thinking about who exactly I wanted to target with my remarks. I won't spend a lot of time focusing on the quarter or the past year, but it is worth pointing out that we just finished our third straight record year and remain extremely optimistic and it's worth pointing out that our 11% growth in US consumer was against a 24% comp and a 39% growth in Hawthorne was against a comp of 64%.
I know there are obvious questions to address. Our stance in pricing, the commodity outlook, excess inventory in the cannabis market, and our thoughts about capital allocation, we'll cover all these topics as well as share our thoughts about fiscal '22, but I've been a public company CEO for 20 years now, and too often, I've seen the markets focus with short term issues, overwhelm the bigger picture. So I want to spend most of my time focused on more than our current results. Frankly, there are a lot of great things happening at the company right now. Some of them I can't share with you, but they're very exciting.
Our business is an important inflection point, one that could transform what we look like five years from now. We have the opportunity to make this company stronger, to make the mode around our business wider and deeper, and to empower a new generation of leaders to shape it through their eyes, not just mine or my executive team. We also see the current volatility in the market as an opportunity. If you're willing to lean in during times like this, there is potential to capture opportunities that others can't and an opportunity to further strengthen your competitive advantages and leveraging those advantages, it's what drives long term shareholder value.
So I want the real takeaway from today to be a better understanding of the journey we're on and I'll be honest, my target audience is pretty narrow. To our sell side friends, I appreciate the need to get your models refined and to share that information with your clients. We're committed to giving you what you need, but my comments are not aimed at you. My comments are also not aimed at short term investors. I'm not going to get pulled into a rabbit hole about our quarterly splits, the spot market price of commodities or a bridge to year over year SG&A.
I do however, want to speak to those investors who see the long term opportunity in SMG shares. I want you to know where we're headed and why we're confident our efforts will create shareholder value. I won't ignore the key questions about fiscal '22, but weave them into a broader context of how we're operating the business rather than the confines of how it impacts the P&L.
In order to look ahead, I need to look backwards for just a moment. For the five year period we completed on September 30, our strategic plan assumed a relatively mature core business and enterprise growth of roughly 4% to 6% driven by the higher growth at Hawthorne. We sought to achieve a consistent shareholder return of 10% to 12% by leveraging the P&L, repurchasing shares, maintaining a roughly 2% dividend yield. We also set a five year target of cumulative free cash flow of $1.5 billion. We exceeded each of those goals.
While we are proud of the achievement, we know that the strategy has run its course because the opportunities are different now and we're different too. And so the next step in our evolution will reflect these realities. We've defined five distinct pillars of growth for the next five years. Three of the five are related to the US consumer business. The other two are related to Hawthorne.
First, we see a higher level of sustainable growth with our existing brands and our core business based largely on our ability to reach a new generation of consumers. Second, further growth of our direct to consumer efforts is there for the taking if we invest in people, brands, partnerships and infrastructure. Third, live goods remains a meaningful growth vehicle and a gateway for a more direct relationship with Gartners.
Our goal remains the same for consumers to see us as a gardening company, not a gardening supply company, fourth to support Hawthorne's future growth. We must continue to put the commercial grower at the center of everything we do. This means further strengthening a model driven by innovation and technical solutions. And fifth, there is no doubt. The cannabis industry will continue to evolve and grow. And there's little doubt that those companies creative and courageous enough to wait into that pool early, have the potential for a first mover advantage.
We've shown our willingness to do this when we created Hawthorne. And as I'll describe later, we intend to do it again. As we pursue these pillars, we are strengthening our team, focusing on session planning and ensuring our ESG efforts are embedded into our operations and also better understood by our key stakeholders. We debated as a team and with our board, whether to pursue all these opportunities at once, we all agreed we had to, but we recognized that succeeding against all these pillars requires us to reorganize and empower a new generation of leaders while there are no plans for me or any member of the current team to step away.
Nearly every member of my team has made changes to their organizations. The level of oversight needed to succeed against these efforts requires Mike Luke Meer to spend more of his time on the strategy and in of the fastest growing areas of the business, he has reshaped this organization so that each of these pillars reports directly to him, therefore he's given up most of his day to day responsibilities in the us consumer segment to Josh Peoples and Dave Swihart, who will effectively serve as co-leads of that business.
On the corporate side, Corey has fortified his leadership team with an infusion of outside talent and Denise S stump and Jim king have realigned their teams to better meet the needs of the business. In addition, most of the M and a opportunities where pursuing include a management team that can further strengthen our own. If every we see manifest itself, we could double the size of Scott's miracle grow within five years.
That's not the goal necessarily. We want smart growth, not growth simply for the sake of it, but the magnitude of the opportunity could be game changing. Let me briefly tell you how we expect to execute against these pillars or where I can. I'll talk about them in the context of our expectations for next year, between the first two pillars we believe the us consumer segment can achieve sustainable long term growth of two to 4% annually.
Our previous strategic plan assume growth of zero to 2%. If we can sustain growth at this higher level, those added two points, carry a significant PNL, leverage and improve cash flow. It's worth noting that the guidance we set for next year assumes flat to slightly declining growth in the US consumer segment. This is based on an assume reset of the business in a post COVID world. Specifically, we're planning for a decline in unit volume offset by pricing.
You'll remember from our Q3 call that we took roughly five points of pricing effective in August. In recent weeks, we've communicated to our retail partners. Second price increase effective in January. This more targeted increase will range from mid-single to low double digits, depending on the product line in total. We now expect pricing in 22 to be on the high single digit side with the goal of covering commodity prices.
While we believe our sales assumption for 20, who is a prudent way to plan the trends suggest a better outcome. Here's why consumer POS and units in fiscal 21 was six points higher than in 2020. More importantly, it was 21 points better than fiscal '19, and actually got stronger later in the year, consumer volume during the fourth quarter of fiscal '21, while down seven points from last year's record performance was 35 points higher than the same period in fiscal 2019.
Consumers are showing us that lawn and garden is an essential part of their lives. Every cut of the data tells us they have stayed with the category. Our brands throughout this past season, those trends have continued in October while it's a relatively small month. It's an important conclusion to the season, especially in the Midwest and Northeast POS and units were up 4% in October compared to last year's record result. And up 42% compared to fiscal 2019 is we enter the off season. The POS numbers won't tell us much until February.
And obviously we won't know until next summer, how much of the COVID bump we retained, but I'm confident we'll have a significantly higher base to grow from. We continue to invest with that in mind. Millennial homeowners clearly have become a demographic tailwind and are more than offsetting baby boomers who are leaving the category.
This group of consumers care more about gardening than their parents. And see the category is more rewarding and purpose driven as well. A 30 year old, couple buying a home today and entering our category for the first time has the potential to stay with us for 20 years or longer. We must operate with that timeframe in mind. We don't want our marketers to worry about hitting a target for Wall Street.
Their job is to drive consumer engagement, brand loyalty and market share. And we're going to give Josh peoples and his team the tools to get that done. The same holds true for our direct to consumer pillar. This area is approaching 10% of our us consumer sales and will only grow higher. When we think about direct to consumer, it goes well selling items on our website. It also means collaborating closely with our retail partners to support their online efforts.
It also means finding new partners who can help us boost the appeal of gardening and have their own digital platforms that we can leverage. Patty Ziegler is one of our brightest and most creative leaders and directs our direct to consumer effort. In addition to the efforts I've already mentioned, she and her team have launched native online brands like green digs, knock, knock, and instead, but one of their greatest successes has been with Aero grow, thanks to Patty's leadership and with the infusion of our R&D and marketing cap abilities. We took a declining business and tripled its sales since 2019 to nearly a hundred million. Patty's been a champion for the potential of our direct to consumer platform since day one and continues to reimagine the future of this business. Succeeding in our direct to consumer effort also requires improving our it and supply chain infrastructure.
Dave Swihart whose role has recently been expanded to lead both supply chain and R and D is driving toward that goal. We need to improve our ability to ship directly to consumers, especially in categories like live goods, which has significant online potential until recently a our direct to consumer efforts didn't want your attention, but that's changed while it remains too early to gauge the ultimate potential of this pillar. It will be a significant contributor to growth as we go forward.
I'm equally convinced our third pillar live goods will be even more important. Live goods are the gateway to lawn and garden a category, but historically have been highly regional, poorly marketed and highly commoditized. We believe we can do better. We've got a great start with Bonnie and its leader, Mike Sutter, and we're working with Bonnie's other owner, Alabama farmer's co-op AFC to pursue other growth opportunities that holds significant potential like us.
AFC has a vision to create a national branded business across several categories of live goods together. We believe we can better meet the needs of gardeners and our retail partners through innovation, marketing and supply chain. We've already made tremendous progress, improving the Bon business. And even there we've only scratched the surface. The other two pillars are related to Hawthorne. Chris will spend more time discussing the current environment, but I want you to know I'm not obsessing about the sales in Q4 or what we think about Q1.
I believe Christmas team have a good handle on the current environment. More importantly, I believe they're navigating the chops in the market while keeping their eye on the long term opportunity. If the market is challenged for a couple of quarters, expect them to take advantage of it. We won't chase sales, but we will take an aggressive stance to further solidify Hawthorne and strengthen its market position.
So expect US, for example, to further enhance our innovation efforts. I finally visited our new R&D facility in British Columbia last week. It's amazing. I've recently visited field stations in Oregon, Florida, and of course, Ohio, what's been the takeaway that the work we're doing on hemp and cannabis research is changing the industry from lighting to nutrients to growing media.
Our research is not just focused on continuing to improve our product offerings, but more importantly, to help growers get a better and more cost effective outcome. Our unique understanding of plant science and the nuances of in the, or cultivation is unmatched. Not only is no one in the industry doing what Hawthorne is doing. Our competitors can't even try to replicate that model. I think you should keep that in mind. We also are likely to use this period as an opportunity to step up our M and a efforts.
We continue to be disciplined in our M and a efforts, but the economic of some of our deals have become more attractive. Recently, the final pillar of our strategy is embedded into the recent creation of a new subsidiary called the Hawthorne collective. I've been alluding for months about the opportunities to invest in emerging areas of the cannabis industry. But this is my first opportunity to discuss the effort in detail. It starts with our recent investment in Riv Capital, a Canadian based publicly traded company that owns or invests in a series of cannabis related businesses.
We share a common vision with the other major investors at Riv to create a fully integrated business based on the acquisition of licenses for cultivation and dis from there roof can partner with some of the most well managed brands in the cannabis industry. There's a lot of speculation regarding the potential for new brands to prosper that the market expands in the categories like beverages.
However, too few people are focused on existing brands in traditional categories. This is already a multi-billion dollar market with brands operating in the silos of individual states. We're convinced there is tremendous potential for some of those brands to flourish more broadly as the market expands. And our investment in Riv reflects that belief. We believe that our unique level of expertise in the cannabis in street gives us the right to win in areas beyond our existing portfolio.
However, today we cannot make direct investments in those areas. In fact, we can't even have a direct ownership stake in a company that does, but we can create an ownership option, which is what our convertible loan to Riv capital reflects. In the near term. We do not expect to see an impact from the investment in Riv, on our P and L and the amount of capital we've employed 150 million does not impact our ability to invest in other area or return cash to shareholders in the intermediate term.
It is possible Riv may seek further capital infusions. We could be interested depending on the opportunities. I'm not going to speculate in how much we might invest. The honest answer is it depends, but just as we did, when we purchased general hydro Botanic care CTA, and can filters, we're willing to make investments others might avoid until there is more clarity about the future. If you're a short term investor, you may not like it. That's fine, but the long term potential is real. And it's significant.
Ultimately, if we convert our financial interest in R into equity, which is definitely the goal, it may prompt us to reassess our current capital structure. Many of you have asked if we'd break haw on off as a separate company, I've said, we'd only consider doing that for strategic reasons and not to chase valuation. And that's still true. Over the past year, we've worked to understand what a potential separation would require.
And I believe we're capable of pulling the trigger on such a move. If we decided it made sense, let me be clear. We have no near term plans to do this, but could it become a viable option? I think the possibility is growing as I transitioned Corey. I want to emphasize that I'm just as confident about our near term plans. As I am about our long term strategy, the US consumer business is performing well and our consumers continue to demonstrate how important they see this category in their lives at Hawthorne. While we continue to expect top line pressure through Q1, I'm confident in our team's ability to power through it. And we still expect sales growth on a full year basis. I appreciate your patience this morning. As I know my prepared remarks are longer than normal. Are there more challenges out there right now than a year ago?
Yes. Am I thrilled with the equity price right now? No, we're on a path to build a better and stronger business, and we won't be distracted by the noise around us. I mentioned earlier that we exceeded all the financial targets we set with our previous strategic plan. And the goal is to remain on a path that allows shareholders to continue benefiting from the opportunities I outlined in our new plan and the pillars that I discussed, the confidence we all have is part of our decision to increase our share purchase efforts. I told you, last quarter, we had allocated 250 million for that purpose. We now expect to add another a hundred million to that total, and we hope to acquire as many of those shares as possible in the next two quarters. There's still a lot to cover this morning. So I want to step aside for now.
Corey, why don't you pick it up from here?
Thanks, Jim. I'm going to spend a few minutes on the big themes from our Q4 results, especially around sales and gross margin. I'll share some thoughts about the guidance we provided this morning for fiscal 22. And in between I'll turn things over to Chris to provide some color on Hawthorne. Starting on the top line you saw this morning, companywide sales growth for the full year was 19%, which was in line with the updated guidance we provided a few months ago.
US consumer sales did better than we expected finishing up 11% compared to the seven to 9% growth we expected at 3.2 billion sales grew by nearly $900 million. In the last two years, the supply chain team deserves a lot of credit for their ability to deliver this growth. The targeted investments we have made and will continue making in this area will prove to be key.
Consumer engagement remained extremely strong through the fourth quarter, and that kept our retailers equally engaged. Although us consumer segment sales declined 28% in Q4, we were up against a plus 92% comp up. Also remember that Q4 had six fewer days this year than last year adjusting for that sales in the quarter, would've declined 23% at Hawthorne. The calendar shift cost us seven points for the quarter.
While year of year sales declined 2%, the segment would've been up 5% on an apples to spaces when adjusting for the calendar in the us Hawthorne business grew by over 10% last year in Q4 given the same comparison. Finally recall that Hawthorne was up against a plus 64% comp in the same period a year ago on a full year basis. Hawthorne grew 39% to 1.4 billion. I'll remind you that number was 640 million in fiscal 2019. We have more than doubled the sales of that business in two years.
And all of that growth was organic on the segment profit line, Hawthorne earned 164 million in fiscal 21 for an operating margin of 11 and a half percent. The profit was up 46% from last year and more than 200% from 2019. We've said repeatedly that we're trying to strike a balance between growth and improve profitability. I think the results speak for themselves as many of, I served as the finance lead at Hawthorne almost since the inception of that business before Joe running the corporate team.
As CFO, as you look at the Hawthorne results, I encourage investors to look deeper than the numbers while the growth and profit improvements have been impressive. The improvements we've made to how the business operates, tell an even better story from the integration of seven separate businesses to the implementation of SAP, the revamping of our sales force and the creation of the world, only cannabis focused R&D program. The efforts of this team have been outstanding. I know all of you want to know more about the current state of the business.
So let me take pause here and turn the call over to Chris Hagen for a few minutes.
Thanks, Corey. I'll leave the details around the numbers to Corey, but I know you guys are wondering about the current state of the industry and how we're navigating it. So let me address that for a few minutes. We're obviously seeing some disruption in the market right now, but we expected to be temporary. Our field sales team began seeing the signs of potential slowdown in late June.
We got smarter about the issues in July, and that allowed us to share some of those insights on our third quarter conference call in August. That's when cautioned that the growth would be significantly slower in Q4 than we'd seen for the rest of the year. Since then, many of you been asking whether this will be a replay of 2018, we don't see it that way at all. And we're not alone. Some of you were in Las Vegas a couple weeks ago for the MJ BI conference.
It's the largest cannabis trade show in the world. And if you were there, you saw first-hand that this is not an industry that's spreading about the future. Consumer demand for cannabis products continues to grow, and the market continues to expand. As it relates to the current environment. What was clear to me in Vegas was that the industry is becoming increasingly adept at navigating choppiness. That's inevitable in a market like this what's happening right now is actually pretty straightforward in California.
There were simply too much cannabis harvested in the past few months, especially from outdoor growers in the Northern part of the state on top of a strong harvest from the first turn of crops earlier in the year, many growers harvested their second crop of cannabis earlier this season due to concerns about wild higher drought. And in the case of the legacy market fear of increased enforcement efforts, the combination of too much product and relatively poor quality is put downward pressure on wholesale cannabis prices.
However, that issue should solve itself once the current supply makes its way through the marketplace because the legacy market remains a big part of what's happening in California, the available data. Isn't great. So that makes it hard to give you a precise answer on how long it will take for the current oversupply to work itself through the market. That's why we're currently forecasting Hawthorne sales to decline in the first quarter that said the single most important fact is the end market for cannabis continues to expand.
And we expect to start seeing growth again in the new calendar year and virtually no one is expecting that fact to change for the foreseeable future. In fact, many high end growers have told us the current market issues are not impacting them at all, and they continue to flourish. Another important fact to remember is that unlike in 2018, there are no regulatory issues getting in the way right now, three years ago, California badly botched the roll out of the recreational marketplace.
That overwhelmingly was the issue that impacted the market back then, it was nearly impossible to get a license to operate legally, regardless of whether you were a cultivator or a dispensary while the current marketplace in California remains more expensive and bureaucratic than other states, it is vastly improved from what we've seen in the past and the legal market there continues to grow.
Some of you are also wondering whether the current situation will result in some consolidation. The answer is pretty simple. Yes, of course it will. But those kinds of ebbs and flows are exactly what we expect to happen. It's what happened in Colorado. O back in 2015, it happened in Oregon when it went legal and it's likely to happen in California to some degree. In fact, that's also what we're seeing right now in Oklahoma, like many new markets, Oklahoma had explosive growth outta the gates and probably got a bit overbuilt.
So we expect a pause there before growth through resumes. We have told you repeatedly over the years that this industry is likely to be choppy from time to time. This is not the first time the industry's seen an oversupply of cannabis. And just to be clear, it will not be the last what's important for Hawthorne is we keep running our play. The growth will be there in the long term. I'm not worried about that.
Instead, I want to make sure that we're doing everything we need to, to distance ourselves from the competition. Jim has already told you that we won't slow down our innovation efforts, which by the way go much further than just new product development, which brings me full circle to the MJ BI conference a couple weeks ago in Vegas, like most major trade shows, MJ BIS was canceled last year due to COVID.
So we haven't seen the industry all in one place for over two years, what was clear to us. And frankly, nearly everyone we interacted with is how far Hawthorne has come in those two years and how much we've distanced ourselves from the competition. We have fundamentally changed our approach to selling, and that transformation is continuing. We've brought new products to the market that have improved the results for growers by both increasing the yields and lowering their operating costs.
And we've used the innovation to help us in more qualitative ways like the establishment of the Hawthorne social justice fund within our corporate foundation. While I understand the questions you all need to ask about the step down on our growth rate, I would urge you not to lose sight of the bigger picture. There is no doubt that we're the clearly in the industry. There is no doubt that our competitive advantages are unique.
And there's also no doubt that the cannabis industry still has miles of runway ahead of it. So looking ahead at fiscal '22, I'm not worried about a few speed bumps, rather, I'm excited to see how much further we can push this business and continue to lead the way in the industry that remains poised for years of growth with that.
Corey, let me turn it back to you. Thanks, Chris.
Let's move down the P&L now to the gross margin line. Like nearly all other CPG companies, we continue to see pressure from higher commodities and distribution costs. However, the year over year change in the margin rate during Q4 requires some additional context. The in Q4 of fiscal '21, the adjusted gross margin rate was 17.4% compared with 24.3% in 2020, but companywide sales in Q4 of last year were up nearly 80%.
So the fixed cost leverage in a relatively small quarter, drove a massive improvement in the margin rate. If you compare the Q4 gross margin rate in '21 versus '19, you'll see the difference is only a hundred basis points. And that difference is a combination of segment mix and higher commodity costs on a four year basis. The gross margin rate declined 270 basis points to 30.3%. The year over year increase in commodity costs of about 85 million.
Nearly all of which was on planned was a primary reason for the decline followed by higher distribution costs. As you know, we did not adjust our prices this year until August in the us consumer business. So we had limited ability to offset the commodity inflation during the first three quarters of the year. That story will change significantly in fiscal 22, which I'll explain further when I cover our guidance for next year, higher volume was able to drive, improve, fixed cost, leverage, and conversion to help offset the commodity cost increases SG&A came in two percentage points lower in fiscal '21 at $743 million.
It declined 21% in the quarter to $161 million lower variable compensation was the main driver. Also in Q4 of 2020, we used some of our strong earnings upside to significantly increase our annual contribution to the Scott's miracle growth foundation, which we did not repeat in fiscal '21 interest expense was 5 million higher in Q4 compared with a go, but essentially flat on a full year basis.
Remember we issued $900 million of bonds in the second half of the year, which drove an increase in the quarter on the bottom line, adjusted net income, which excludes restructuring impairment. And onetime items was up 28% to $528 million or $9.23 a share. That's just a penny shy of a $2 per share increase in a single year in more than twice, the $4.47 a share we earned in 2019.
The EPS number is on the high end of the revised range. We set in early June and is a major accomplice given the difficult comps and some of the cost hurdles we've had to clear in the second half of the year. We're obviously glad to answer any of your questions regarding our Q4 or four year results, but instead of spending more time on those details, I want to switch gears and share our thoughts about fiscal 22.
As you saw in the press release this morning, we see company wide sales next year of about flat to plus 3%. This assumes the us consumer segment is flat to minus 4% and that Hawthorne grows eight to 12%. None of those ranges assume the potential impact from acquisitions in us, consumer. We are going into the year with the assumption that unit volume will decline high single digits.
Roughly half of that decline is expected from lower shipments in the first half of the year. Remember that last year's Q1 was up nearly 150% as retailers worked hard to remedy depleted inventory levels. Since current retail inventory levels remain higher than a year ago, we likely won't see a repeat of that kind of initial load in we're also for planning purposes, assuming modest declines and consumer takeaway in fiscal 22, mostly driven by the different comps we face in the first half as Jim already indicated.
Consumer POS has been stronger than we expected in recent months and has actually been positive for the fall season. It's easy for us to lean in to meet the higher consumer demand if it comes. But the prudent play is to assume a slight decline most, and perhaps all of the planned unit volume decline should be offset by pricing.
You should see some benefit from pricing in Q1, from the August price increases, and the balance will begin during our Q2, as it relates to Hawthorne, we're planning for eight to 12% growth on a four year basis. As we expect to see continued pressure and Q1, as Chris said, it's hard to be precise regarding the current inventory supply issues in the industry, but we're hoping to see a return to growth sometime in Q2, let's move on to gross margins. We expect to see gross margin rate declined by 100 to 150 basis points on a full year basis.
We are cautiously optimistic that our pricing moves will offset expected commodity pressure. That said we expect about 65 to 70% of our costs to be locked in by the end of the calendar year. So we'll still have some exposure. If costs move higher than the planned increases. We are assuming the two biggest pressures on rate next year will come from lower fixed cost level and segment mix.
We would expect some leverage out of SG&A meaning. This line can range from a 6% decline year over year to a slight increase, maybe 2%. There are no major moving pieces in SG&A, and we were made committed to investments. We believe will drive the business, not just in fiscal '22, but the years to follow below the operating line interest expense should be roughly $25 million higher based on the full year impact of our recent bond offerings.
Our guidance also assumes no offsetting earnings impact from acquisitions, which is a pretty conservative, starting point. All of this rolls up to a guidance from range for adjusted EPS of $8.50 to $8.90. I also want to talk about cash flow for a moment for the year we just completed free cash flow. That's operating cash flow minus CapEx came in at $165 million while that is low from historical standards.
There are three main reasons behind the year of a year. Decline. First was variable compensation that was earned in 20, but paid out in fiscal '21. That was about a 60 million impact. Second, we increased CapEx by about $45 million. Third inventory levels were up 500 million from fiscal '20. While most of this increase was paid during the year, we did lean on our vendor partners more than in the past to achieve extended payment terms.
As we looked at fiscal '22, we're aiming for free cash flow of up to $300 million. We expect CapEx to increase again and we also expect inventory levels while flat on a unit basis to be higher overall because of the increased cost. These investments are necessary to continue meeting the required service levels to our customers, which is the higher priority, but as it relates to inventory, we find ourselves in a very good place right now in both us consumer and Hawthorne.
We believe some competitors will have a hard time meeting demand. And in the consumer business, we expect the market to see shortages of grass, seed and peat MOS. The key ingredient used in growing media. We do not expect to be impacted by those issues, and we do not expect to have any problems getting our customers at the appropriate inventory levels either before we open the call for your questions, I'll offer a final bit of commentary.
I agree with Jim's assessment, we've got a lot of moving pieces right now, and several active initiatives that could require us to update our outlook as we move through the year. But even in the unlikely event that none of those efforts come to pass. I believe the businesses in a great spot. The challenges we're seeing on the cost of goods line are pretty consistent with what you've been hearing from other companies over the past two weeks.
And just as we said, we would, we've taken aggressive action to stay ahead of all those and protect the profitability of the business. When I think about how far this business has come in such a short period of time, it's hard not to feel good about where we sit right now.
And so with that, let me turn things back to the operator so we can take your questions.
[Operator instructions] We'll go ahead and take our first question from Jon Andersen with William Blair.
Good morning everybody. Lot of different questions. But let me start with Hawthorne. Understand the situation in California and thank you for the color on that. I'm wondering, I'd like you to comment on what you're seeing in some of the newer states, really over the last year a number of states have legalized adult use cannabis and yet in some of those states are quite large such that the total population are living in states with adult legal has risen quite a bit. My sense is that you haven't really seen demand from those newer states yet. Could you provide kind of an update on that and when you expect that to kind of kick in, thank you.
You're absolutely right. We saw a lot states and when you talk about high population states that have seen adult use pass, I assume you're talking about states like New Jersey and we've, we've always liked to give you guys and, and ourselves, frankly sort of a year, we think from passage of laws to say, that's when we expect the market to kick in. And while I think that's a reasonable estimate in most states you do have to couch that with the reality that this is depending on state legislatures, getting the regulatory frameworks for these markets set up.
And that's something that in a state like New Jersey has taken a lot longer than expected. And as example, New Jersey had a big slate of social equity licenses adult use grow that were supposed to be granted back in 2019. And those licenses were just granted two weeks ago. Just an example of how slow that state has moved to actually approve what the voters have asked for and in that state, those adult, used licenses will not actually be able to sell into the adult use market for a year after they've been operational under medical.
So those guys would have to build out their medical grows, start operating for at least a year before they're eligible for adult use. So even when they pass adult use, we've seen some regulatory hurdles that just really stretch that timeline out for us. So we expect New Jersey to start kicking in. We're seeing some really early results, but it's still a very small state for us. So again, it's a year has always been our kind of our number, but it looks like that may be a little, a little optimistic in some of these Northeastern states that have kind of no existing framework and they're kind of figuring out on the fly.
Great. That's helpful. Appreciate that there, just as a follow-up maybe I'll stick with something bigger picture. So you mentioned live goods several times as a gateway to lawn and garden. It's one of the five pillars that you outlined of growth for the next several years. So what can you just let us, w what have you done and accomplished so far in life goods a little bit more color around that and when you look forward, what is it that you haven't done that, that you want to do in live goods that would be, a creative to your growth and earnings, whether that's more with Bonnie, whether it's broadening the relationship with AFG, etcetera. Thanks.
All right. I think I'll start and then hand it to Mike, who I view is really sort of the, the author of the strategy, which I'm totally behind. I'll just hit what the, what, what have we done? And, I think this year we've stepped in or privates a little bit and, and learned a lot. And I can let Mike talk about that because I think that's, what are we going to do?
But let's start with, what have we done. I think we bought the, or partnered with ASC on the finest brand, really the only brand that's national in live goods and that's Bonnie and worked with them to really begin to professionalize. And, and it's not that they were unprofessional, but I think we, we've learned a lot of how we want it to be.
Mike has really led that from our side. And, if you say, where are we want to go? Is we want to participate in the other categories under the same kind of idea of branded national, the ability to use scale, but let's just remember what was our original interest in, we're saying now when it's true that we just don't want to be kind of a lawn and garden chemical company that people garden really.
And it starts with plants in the psychology of why people want a garden and this whole lot of really good stuff for us in that. But, we want to play in plants and we view basically is a high growth area. So if you, even, if you look at what we're saying now, which is, we believe based on younger people, they are people wanting to own homes very different than probably five or six years ago when we were saying people are going to want to move to the city and have a condo and not have a yard.
I think we feel very differently than that now. And young people want own homes. It's the gigantic bubble of kind of our kids who are at that phase now where they're buying homes and having kids and the dog or whatever, and that data, we talked about a little bit, they want to garden. And so, if you look at our core and you say, we think we can kind of double that, which is not saying a lot.
I think Mike and I struggled with that, zero to two to two to four. But we're seeing a growth rate in live goods. That's, at least two X that. And so that was the attraction to the business, plus this idea of getting involved more in sort of the basics of, of gardening and the brand side of it, which Bonnie brings to us.
So the question of is like, what have we learned and kind of Mike, what's your addition to the craft? Well, I think having a national network and is a, that's what Bonnie brought, but the sophistication there, there are really no other than Bonnie. There's no other national brand. There's all kinds of really cool genetics and activity that we can bring to the market. And we look at it as tie in the solution for the consumer with our other products to actually give the consumer a better opportunity to have success and enjoy gardening.
So we're tying it all together. We're looking at succulents, we're looking at all, we're actually doing succulents and we've expanded and doing some color miracle, grow flowers, or are in lows. And so we look at providing that national and supply chain infrastructure, which is probably the weakness of every growers being able to supply nationally those products and then expand also when direct to consumer and get those products there.
So how much of your time is going into that Mike? Or the supply chain of getting that where you want it?
Oh, it's probably 20%, 25% right now. So there were really no cysts. I mean, we've integrated companies. We've got to integrate those systems. And if you remember where Scott's was from eight to six years ago, it really was an isolated supply chain. This is really nationalizing the supply chain of the live good companies and really making it more effective. And so, and the branding and the bar name, and I would say indoors actually a huge opportunity that is really underdeveloped. And so we want to simplify that for consumers.
That's helpful. I'll pass it on and get back into the queue.
[Operator instructions] We'll go ahead and take our next question from Peter Grom with UBS.
Q - Peter Grom
Hey, good morning, everyone. So just a few questions on Hawthorne for, for me. Maybe just to start, Jim, you alluded to a greater willingness to separate Hawthorne from the legacy business. And I know you said that it's not something you expect in the near term, but could you maybe help us understand what is driving that growing competence that this is something you may consider and then what could actually push you over the line to actually making that happen?
I'll start there. Like I could go on for an hour on that one, let me start with how welcome Hawthorne is within sort of the SMG world. And that, I think I probably told you guys this before. I think Christmas, I think was always kind of a reluctant partner. And I think it's, I don't know how long Chris you've been in this job now, how long? Seven, eight years. Just one dog life.
I think if you look at what we're doing with supply chain innovation, you're not really advancing sort of science the stuff that week plus also being a buffer or when they had issues like an 18 where the, the largest of Scott's really helped. So I think it's very much a virtuous place for Hawthorne to be in it. It's I I'd call it probably highly synergistic.
So when we get into this question, the separation, the question is, and I'm not saying you would suffer disintermediate, but I think it would have to be strategic enough that well, but Chris is nodding, there would be, but I think there's arrangements that could be made to sort of minimize that. Why would I do it? Because I think there's opportunities out there with like-minded partners that is big.
And I don't know, Peter, I don't know. I don't think we've met. I don't know if we have, I apologize. But let's just say maybe you don't know me that well, I'm just not that good as a minor partner. I think we've been doing deals here where we're -- we call it is respectful minority interests, because that's kind of what people are willing to tolerate. A lot of the people we're dealing with on a future basis, this is now sort of confidentially talking down the road.
I think they don't want to sell their businesses. Would they participate in something that added a lot of value and became something important? I think the answer is yes. Would they sort of join the allied, military, whatever you want to call it. The answer is yes, they would. And if you look at the dollars involved I think it would be challenging to do this on the long term where we are a relatively small partner. I think what we have to offer beyond sort of what Hawthorne is management structure, capital access to the public markets, both equity and finance. There's just a lot of things that, that we have to offer and to sort of have a real seat at the table. In my view is the big dog in the room in the industry is Hawthorne for the right structure.
I'll speak for myself because I have a management team that, or my partners I got a board of directors that I have to sort of work through. My family. I, I think I could see a contribution of Hawthorne in spite of sort of how welcome it is here to put together the right structure. And I think that what that offers, and I don't think we've suffered is there as a result of thing, it's not super clean that you, this sort of cannabis business stuck into a consumer lawn and garden market or business. And, I think especially when the stock price was higher, I thought it was, properly valued of Hawthorne's value of Scott's value combined. It felt better than it does right now, but it felt right.
And I didn't think it was disadvantaged us at all. I do think that there are people who would make an argument and I'm sympathetic to the argument. That doesn't mean I completely agree with it. Let's say it's cleaner to have people who want to make investments in sort of the cannabis businesses, especially if something was this strategic is what I envision and not have that mixed into the sort of lawn and garden business, which is a slower growing, probably more cash flow positive business.
So, I could make an argument that, that, that would be the right thing or could be we've also spent if we stay on this say the last 18 months making sure that we have separable financials that sort of our finance people in a, in a sort of public way.
And we are, I don't know, I was talking to Ivan Smith five a week, two weeks ago and said, we're there, right. We're there from a financial and legal point of view where there are several. And I think what you said is, within a month or two I think that's correct. So again, there's no rush to it, but I do think that, and this question that came up about sort of the east coast in Jersey I think these are very valuable opportunities and I think the dollars and remember these are no, I'm not going to get critical. The United States government except to say 280 is a piece of. It's ridiculous that the United States government makes more in public marijuana than the owners of the businesses that have invested behind them.
And it has to be fixed and we're involved in DC sobbing that, but on a before tax basis, these are significantly profitable business in their early years. And so I think that if you look at the value of these businesses you can get to the point where you're getting into real money and to sort of deal with balance of power issues.
That's where I get to saying, Hawthorne really has to be a part of that. And so I hopefully that answers the question of, but I, don't, we're on the cusp of a deal, but if you were one of my brothers or sisters and they said, when do you think this could happen? I would say a year or two years, something like that. I wouldn't be surprised. One last thing, I'm not sure I've actually done a call where my son had a speaking part.
I will say as I'm a dad, I'm pretty happy and proud to be sitting here, with my oldest son at the table. And, if I was representing to you guys, I would say he's ready to run things, he's maybe better than I am. So I do think that the biggest thing we're working right now is just make sure we understand kind of the map that we're developing with some other people on how this thing progresses and then putting the management team together to actually support that business. And Mike and I, and the board spending a lot of time on that. So that's a pretty open answer in truthful.
Q - Peter Grom
Okay. No, that was really helpful. Thank you for all of that, but I, I guess maybe for Chris, I was hoping to get your view on the cadence of Hawthorne. As you look out to fiscal '22, can you maybe just help us understand the magnitude of the negative pressure you kind of expect in Q1, what gives you confidence that it will snap back so aggressively to kind of, to hit this high single digit, low double digit target for the year, is there enough conservative conservatism and your guidance, like, should this, underlying trends take longer to improve?
And then just, I know there's a lot here, but just, the Oklahoma comment, can you maybe help us understand how big Oklahoma is for Scott's or, or the broader industry? Thanks.
Yeah, no problem. So, Oklahoma's, or has become a somewhat material state for us. It's, we saw kind of thousand plus percent growth over there in, in, in that state over the past couple of years. And candidly, it was a state that we've been talking internally about that we, we need to prepare ourselves for, for a little bit of fallout in Oklahoma.
Just because you can't see that kind of growth forever, and you saw similar growth in states like Oregon back in 2017, which led to kind of end product saturation in those states. And the resulting kind of fall out that we dealt with a few years ago. Now, again, like I said, in the prepared remarks I don't think anyone is anticipating this to be the same amplitude, because like I said, in their remarks, there's, there were structural regulatory issues that were compounding the oversupplied, then those, those don't exist here.
In terms of what gives us confidence that this can be sold through. And look, I was out in Vegas a couple of weeks ago. I know some of the analysts were as well. And I heard from a bunch of people who are pretty smart folks, who've been in the industry for a long time. I'm talking, real cannabis people right now, not sort of corporate folks, who've, who've won their way in like us.
But I mean, real cannabis guys who said, look, this is not to scare anybody, but this is the single biggest end product flood that the cannabis market's ever seen. And I think it's probably true. The what gives me confidence here is this is a perishable crop. It's only going to stick around for so long. And as I also mentioned, the prepared remarks, this is something we're really seeing affecting the kind of middle and low range, the markets much more substantially than the higher ends.
You talked to a lot of high-end growers, they're growing more cannabis, high-end legal growers, they're growing more cannabis than they ever have. They're selling it for higher retail prices than they ever have, and they're selling everything they can grow. And to be clear, that is the core of our customer base. Our consumer base is folks growing high quality cannabis indoors. So we got a pretty high degree of confidence.
We're going to see this thing shake out, I would say over the first quarter of the next calendar year. So first quarter of Q1 or first quarter of '22, we think the single shake out, look, we, we have been wrong before. I think we we've got better Intel on this than, than anybody, frankly, that includes our competitors. And I think we've got more experience here too. Corey is really only member of my management team.
That's, moved on since 2018 and he's moved into the CFO role working with Jim. Our team seen this kind of action in the marketplace before we knew what was happening when we saw it coming. We knew how to prepare for it as best we could. So I feel confident in the numbers of the full year, obviously they're back loaded to the, to the second two or to the third and fourth quarters, but again, our confidence is high. It, the oversupply will shake out and when it does, we are going to be better positioned than anybody to take advantage of the market.
Q - Peter Grom
Super helpful. Thank you. I'll pass it on.
All right, we'll go ahead and take our next question from Bill Chappell with Truist Securities.
Thanks. Good morning. I'll try to keep it short. First on, on Hawthorne kind of M and a commentary, explained to me, I guess the, the, the rationale behind you, you have a pretty broad base of products. Most of the M&A you've done or now, so in the past year has been really, really small. And, and I understand that valuations are, are more attractive.
But, it's kind of, why bother if you could end up buying 300 different, $10 million versus build it yourself. So help me understand why that, what makes sense versus a kind of a part two to that, that first question of why didn't you actually repurchase shares in the quarter versus repurchasing them going forward.
A - Jim Hagedorn
I'm just sort of stunned by the repurchase part. Let's just talk real quick about sort of M and a pipe for Hawthorne, not the Hawthorne collective or what we'd call a Paulo internally because they're quite different. Bill, you've been with us a long time, I would say, what are we like on the consumer side?
What we have always called close in adjacencies, these are businesses and because of the sunlight connection, there are opportunities in distributed products for us that we understand that we already sell that we know if we bring into our supply chain, you're talking very significant IRR, and I'll just throw in there that, the cultivation industry with all the respect, to the many fantastic people out there doing that kind of work people when they have something works, they really stick with that.
And so there are branded businesses out there where getting people to change is not as easy as it seems and where there are significant opportunities and synergies, and we can buy at a fair price and then apply the synergies to the business that, if I took you through them and I'm not going to do that right now, you would basically say, oh, hell yes, you should do that. Not very exciting.
Look, I want to go back just to led lighting for a second. Led lighting was a business that really three years ago hardly existed, at a big level that represents today, our single largest category and well, over 50% of our lighting dollars are now on LEDs. And I'm telling you this is all based on innovation.
We're, I think together with Mike and his R&D team, Chris and his folks defining the need Mike Porter from Harvard, building a strategic reason for that is based on unique and important innovation. And so this is a business we did build by ourselves. We built a category by ourselves and it's growing. And today we are pretty significantly backordered on our led lights.
And so, this is an area where if we had more components, we'd be selling more products and not a little bit. So I, I think that your question is we're doing both, we're doing both innovation and building it ourselves. Okay. And where something is a close in adjacency, and we can just buy it up. Mike and Chris and their guys on the supply chain side could do their work. Plus we can then put our R and D effort against it.
I think the economics of it make a lot of sense. And if I was telling you about it, like deal by deal, you say, I agree with you. So I don't think that Chris, you should pick it up from here if you want. Yeah, no, I, would like to when you help with the small deals that we've done recently, it's rhizome floor and hydrologic. Those are deals more in the case of, rise, a floor is at close in adjacency. Jim is describing, and I mean, we're talking close in both sort of from a category perspective, the rise of flora facility in Santa Rosa, California literally shares a fence with the legacy general hydroponics facility that is still our main liquid nutrient production facility. They share a fence line, your next door neighbors.
So that was one, we knew that team pretty well. We love the product. We love the brand. We love their ability to really get traction in the marketplace. And there could not have been an easier integration for us because we were next door neighbors already. I mean, literal physical next door neighbors in case of hydrologic, that that deal goes back to when we first bought general hydroponics.
And I was talking to Ross Haley, who at the time was the CEO of VH when, when we did that deal and said, Hey, Ross, where should we go next? He gave us a long list of brands. Most of which we've acquired in the meantime, the top of that list was hydrologic. It took us a while to get that deal done. But that is a brand that is really stands alone in the, in the sort of the subcategory of reverse osmosis water filtration.
There is hardly a commercial grow. You walk into that does not have a hydrologic system in that facility. Their list of contacts and relationships in the industry is extremely deep and includes a number of cultivators that we didn't have much relationship with. So to us, that was one strategically. It was always on our list. It took us a few years to get there, but it, it just, we, we never forgot about that deal. And I'm really, really happy that we got it done. The team there is phenomenal.
And the past few months of getting them integrated the businesses, over-performing our expectations, even in this marketplace. And then I just want to just last on repurchase, no, our shareholder friendly approach that was really came out of project focused on whatever we, I think that's what we call it. That was what we presented to everybody that we don't really see a ton of opportunities out there to acquire that are attractive to us.
So we'll just send the money back to the people who own this business. I think part of what you're hearing on this call is that that's not where we're at right now. That's the change? That's when I say, I wouldn't say the strategy had a shelf life, but what's changed the opportunities around us, whether it's live goods, whether it's been direct to consumer. I mean, these pillars that I've been talking about are the opportunities and we're organizing around those. So Mike has the ability to stay on top of them and they all report in.
But they all have growth rates that we think, and we've got this fantastic business, the core slower growing high cash flow. And, remember that $165 million plus $500 million of inventory, plus cap ex plus, you're talking like, I don't know, 700 million hours of cash flow, this in '21 before you make those adjustments so it's a, it's a really great business.
The other businesses are, we think are pretty obvious and higher growth rates, and that's kind of why we're chasing it. And that's why we basically have said we got to integrate some acquisitions. Plus then if you look at the Hawthorne collective opportunity w we want to invest there as well. And that, and that's really why we decided that returning cash to shareholders is still an important component of what we're doing, but it's not the only thing we're doing. And that's a lot of what Corey and I try to balance is, what's the right investment in the business, but it's, there's a lot of opportunity right now. And, I'm sort of really hopeful. The United States doesn't step in the way. I don't know, I'm watching the FTC, but what
I was just going to add it, if you, if you go back to last year share prices were a lot higher, are returned to share a reassured return of value to shareholders was going to be more around in the realm of a dividend versus a buyback. If you go back four to five months ago, share price was a lot higher. We did buy back about $40 million of shares in Q4. So it wasn't that we were out of the market now going into Q1. We're feeling more comfortable with where our Q1 is the results we're seeing in the marketplace. And we think that we can buy into the market on share repurchases at two to 3X that level and feel comfortable with it.
Got it. Well, I'll leave it there. Thanks so much.
All right. We can go ahead and take our next question from Andrew Carter with Stifel.
Hey, thanks. Good morning. I just, I guess I wanted to ask given that the midpoint of your guidance next year suggests the gross margin will be down 430 basis points where it peaked actually earlier this fiscal year trailing 12. So could you help us understand, how the GM will phase for the year's pricing absorbs inflation that comment around pricing above inflation? Was that a full year comment or was that expected to happen at some point and final comment? Just so we can get a sense of the ongoing degradation potential for mix, where does Hawthorne's margin stand today and where do they own brand stand? What's your penetration. Thanks.
But I want to start this, thank you for asking that series of questions. I was in fitness this morning with, with Ivan and I said, I'm at a disadvantage, the budget or at least the expectations we're setting. I do want everybody to understand how and why we sort of talk to you the way we have today. And I think then it probably is useful.
Setting the budget for this coming year was, I think Corey would say we were looking at sort of neutral operating '22 versus '21. I would say we looked at, and they're both true. We looked at sort of what the street was throwing out there as a number for expectations for Scott's for next year or the year we're in. And we built a number that I don't know, call it was a quarter of what we were seeing is sort of consensus felt that was a pretty good place to start it, to be honest, it's a pretty negative number for us.
And based on that, we then started building an operating budget off of that. That said, if it's that bad and I don't expect it to be, this is the point I'm trying to get across. Is can we still, can we build a budget that meets that number, your consensus plus call it a quarter and still fund the things we want to fund and be responsible about how we run our business. And I think this is Corey's input to his first budget cycle with us in this role. I really look to Mike to say, duty is this killing you? Because, I view budgeting as a pretty corrosive process. Actually. I really don't like it that much. I know it's necessary, but it's pretty corrosive, particularly when you make inputs like that.
And Mike was okay with it because I think he, it, it sort of forced the issue of saying, are we spending the money in the things that we think are going to drive the business and can we lighten up on some of the other stuff and still make the numbers work? If the numbers are as bad as we're building the numbers from. And we came out with, I think, an agreement on that, and this is what we're reflecting in, how we talk to you guys. But my numbers in Mike number are they're quite a bit higher than that.
And therefore, I just want everybody to kind of, every time I say stuff like this, people freak out, everybody gets the joke that we, this was a budgeting exercise. We're setting expectations based on partly where you guys were partly based on this view of quarries of can we least make the same operating numbers as we did last year, and how then this has fit in with how Jim wants to manage the investment community.
And, as we get into the year, not get ahead of ourselves, but start to become, more transparency on the upside, hopefully that's there. And that's how we, we kind of got to these numbers. So I, I do think when you ask the questions, try to understand that it's not like we're absolutely committed to these numbers. What we're committed to is a budgeting process that allows Corey to feel good, that he's not overextended on the offense side.
And that Mike feels that he's spending the money on the things he wants to, and we're not over promising to you guys. And this is all part of the, how, how we do it here this year. I briefly had a board meeting yesterday to go over this stuff. And I wanted to kill myself during the meeting based on what we're telling them, which is kind of what we're telling you guys. And it made me feel bad about the business, but the truth is I feel really good about the business and Mike and I are, committed to a lot higher numbers. And so, I think when you ask the questions, try to at least look through it, that sort of filter and Cory, so I'll hand it to you to the real questions.
Yeah. I said two things. You brought up total, a company margin rate. We guided to a decline of a hundred to 150 basis points. If you look at the components that make that up segment mix, as Hawthorne grows faster than the us consumer business, we're going to naturally have a, an enterprise wide decline in our margin rate, just because the margin rate of those two businesses.
So that's going to be about half and if the units come in where we planned, which is the decline, we're going to see some deleverage that that will hurt our margin rate. And like Jim said, we're all expecting units to come in better than that. But given the plan that we put in place the de-leverage could happen, should units come in lower and I'd say your point on pricing versus costs, they, they basically offset each other.
So if you look at the margin rate pricing and cost offset each other we do have some buying left to be done in the rest of next year. We're, we're kind of a third exposed if you think of where we'll be locked at the end of the calendar year. So there is risk out there or opportunity, depending on what happens in the marketplace for costs to, to change where they're at in our model today. Know last point on the Hawthorne EBITDA you asked about where, where the Hawthorn profitability is.
We're planning on about 500, I'm sorry, 50 basis point improvement a year of a year. So this is on the path that we've been on trying to get to a total earnings percent of 15%. And we continue down that path. We saw good improvement in 21 and expect about 50 basis points in 22.
Great, thank you. This might be a difficult question to answer, but, you've cited kind of the pull forward of the crop in the outdoor season in California, which I guess the potential upside of that is, is that the OKR October's really bad. So could you kind of quantify for us then, like maybe how the earlier pool, like not selling to growers in August, September may have hit numbers, whatever product lines that might've affected nutrients just to go. So we can kind of think of a back half headwind that hit this year and potentially comes back next year. Thanks.
Yeah, sure. Look, you already said it. The, the slowdown has affected our consumables business significantly more than subjected our hardware business. So nutrients growing media, some other categories we've seen, we've seen much more downward pressure, which to me says that the operational guys are kind of slowing things down, waiting for product to sell through and not wasting a ton of time pumping more product into a market. They know isn't, isn't really moving right now.
On the other hand, the kind of high ticket hardware sales we're seeing. So this lighting dehumidification, water filtration, et cetera. So kind of infrastructure stuff. We're still seeing really good uptake in the market on those products. And again, it's, in some cases outstripping our ability to, to meet the demand just with some supply chain disruptions we're seeing particularly on lighting.
So we think that's all going to shake out. We're still seeing again, new facilities get built is what that tells us. And those facilities will come online. And when they do, they'll be buying our, our nutrients, our growing media which are all products, we were seeing exceptional growth in leading up to figure June, July. So the back half of the year, we're really, it's kind of stacked with a lot of nutrient, a lot of grown media sales.
But when we've dropped innovation on the kind of the hardware infrastructure side, it's sold, I beat my chest last year about the new Gavita led light that was at the time was our first-generation led lights that set a record within Scott's miracle grow for the single largest, from a dollar perspective, the single largest product launch in company history. We beat that record this year with our new led light. We're selling more dehumidifiers from our partners at quest than we ever have before, including some really exciting, very expensive kind of high tech units that cover a broad array of HVAC stuff for the grower.
So we're seeing those products continue to sell. We're not seeing a lot of slow down there. We're just waiting for the consumable side of the business to catch back up.
Great. Thanks. I'll pass it on.
Okay, well go ahead and take our next question from Joe Altobello with Raymond James.
Hey, thanks guys. Good morning. So Chris, just want to follow up on that last comment regarding California. How quickly can, can these indoor growers ramp up their operations once pricing starts to improve
Pretty rapidly. Look, it depends on what stage of build out there at obviously and we've gotten pretty good Intel that there are, there's a number of largely built out groves in California that are available right now to, for potential acquisition. So we know that there's some growers that are sitting there, kind of half built or mostly built that the growers aren't finishing until, until the market recovers.
So we expect to see a pretty rapid recovery once, once the market prices kind of encourage growers to get back into it. So again, these facilities that are largely done, it should be, I would say certainly less than six months from when demand recovers till those guys can be operational at full steam. And I think frankly shorter than that, I mean, isn't it through also in the legacy market or what have you call it, traditional markets. But this is kind of like a gypsy business where people can get in and out very quickly.
Yeah. That's always been the case. So this is for the end look to the extent that we have visibility to the legal status of the people consuming our products we sell ourselves to retail and where it goes from there is somewhat anyone's guests bore aware that there's a lot of black market growers out there what we call legacy market growers.
Those folks will shut down for a quarter just cause it's, it's, it's four lights in their garage or six lights in the basement. And it's kind of a supplemental income for them. If they're not seeing the rewards for the activities that, that offset the risk they're taking, they'll shut down and wait for that market to recover and all that gear sitting there waiting to get switched back on. So that, that recovery right there is pretty much instantaneous. And like I said, we think our expectation is wholesale prices. We'll, we'll start to recover within the first couple of months of the new calendar year. And at that point we expect to see market recovery follow.
Okay. Helpful. And just one more for Corey what's the anticipated incremental commodity and logistics headwind in '22 in dollars. And it sounds like correct me if I'm wrong that the price increases the high single digit price increases call it not only offset that dollar for dollar, but you're maintaining your margins in both businesses as well.
Yeah. If we look at the rates that we're putting into the plan for each of the, each of the segments, segments are basically maintaining margin at the plan that we have built in now. I think of headwind that we've experienced so far kind of $85 million that, that we saw in 21 that number will get annualized as we, as we go into seeing those higher rates on those commodities for the entirety of 22 or at least the entirety of our purchasing cycle. So headwind there, the, the pricing that we're taking, those should negate that in. We should be kind of a margin neutral as it comes to commodities.
And we'll take our next question from Eric Bossard with Cleveland Research.
Thanks. Trying to understand the importance of pricing on the Hawthorne business. And I'm talking about end product pricing, and I thought, Chris, your comment was interesting that your exposure is to the high-end. And then I'm trying to square that with your, if your exposure is at the high end, but your business is softer now. And it seems like the business softer now is not the high end. So what I'm trying to make sense of is when cannabis prices go down, is that bad for you? Does it matter for you? Is that changing to just help explain that?
Yeah, look our focus is on the high end but we've got pretty broad exposure here. And some of our really high volume products are used across kind of the quality spectrum. I'm talking things like our grown media products grow down and that sort of thing, growers of every different kind of quality level and station in the market use those products and look wholesale prices, absolutely wholesale and product prices absolutely matter to us.
And that was something when we did a post-mortem of what happened back in 2018 in an effort to, just have a little bit more predictability cause we knew that it would, it would happen again in some form or fashion. And here we are one of our, one of the kind of leading indicators that we really zeroed in on was that wholesale cannabis price, both in the illicit and legacy markets.
And we think we've got pretty good feelers out into both those areas to get up to zero in on what we think are, are, are pretty accurate prices. Look, the high end guys are, are pretty insulated from the downward pressure, but they're not insulated a hundred percent. So when you've seen, price per pound of, of outdoor flour hit all-time lows and I'm talking, well below $500 a pound that wholesale for outdoor flower the, the high-end indoor guys, they have seen some price depression as well. It's just not been nearly to the same extent.
So, if someone in the indoor market could have sold a pound of flour for $4,000 a year ago they may be down to $3,200 or $3,000 now. So they've still seen a significant downward pressure on their price. It's just, again, it's been really well-insulated relative to the, to the outdoor guys now again, so we do, we do see some impact from those guys. But again, we sell, we sell plenty of product, the outdoor into the sort of light DEP greenhouse dudes as well. It's just not the focus of the core of our product line.
And then in terms of your assumption of where the business goes like, does, does the business work the way you want it to work with pricing where it is now? Or do you need pricing to get back or halfway back to where it was?
I think, look obviously wholesale prices recovering is going to be beneficial to our business. So, growers will have more cash in their pockets and they'll have more cash go and spend with our retailers. So we're looking forward to, to recovery. That being said, look at ultimately I'm, we're talking long, long long-term and very speculative. I think most people who look at the industry expect ultimately there will be sort of longer term and longer lasting downward pressure on cannabis prices.
And part of this is the responsibility to cannabis industry as a whole and something that we're work cited to hopefully have some influence over. Once we really get the Apollo, the Hawthorne collective strategy off the ground is, is preventing the commoditization of this product. We had a million questions from our board and from, from investors and other people to say, what's going to stop this from being tomatoes or lettuce.
Now number one, I think, you guys have been talking to you, well, not, I shouldn't say you guys specifically, but people have been talking about how this injury can go outdoor and the margins and the prices are going to get crushed and that just hasn't happened. Now, and we don't expect it to happen. We have long been advocates for it is going to stay largely indoor and greenhouse. It's just, it gets much more controlled. We can create a much better product for the consumer for the patients.
We expect that trend to continue and we've spoken to a lot of people who are, I think, as informed, intelligent in the space as anybody people who've been operating both in the illicit enlisted markets for decades who believe that that outdoor does not have a long standing place in this we've got products that are solving sustainability issues around indoor growing right now. And, and again, you can be so much more precise with how you control that environment. Getting back to your question though, look, we want to see prices recover. We have a business that's built and can survive at prices, do not recover all the way, but we, we don't expect that to be the case.
Okay. And then the follow-up for Jimmy made a comment that I know you didn't commit to, but game-changing opportunities that the company could double in size in the next five years. Is this a collective Apollo? Is this the path that you're, you're speaking to that to accomplish this?
No. Yes, yes and no. It's the five pillars to do it. I think your, like I said, we believe that there's more growth in the consumer business, our legacy consumer business. Obviously we believe that there's faster growth on direct to consumer live goods, we think is actually a big piece of that. Hawthorne. We continue to see in the hydro supply space, above average returns for us there.
And then you add on top of that the Apollo side, and I think, you can pretty easily get to those numbers. A lot of stuff has to happen correctly, but I think the answer is it's all of them. Thank you, Madison. If I can just interject here for a second, we're going to just in the interest of time, we'll just pick one more question here and then we'll wrap it up.
Okay, well go ahead and take our last question from Jeff Zekauskas with JP Morgan.
Thanks very much. Thanks for squeezing man. W when you read some of the PR hi, when you read some of the press accounts in California it claims that the California market is about 2 million pounds and there's 6 million pounds of capacity. That is it's two to three times over supplied. Is that a fair characterization?
And then secondly, do your raw materials con raw material costs continue to rise that is, do you expect them to be higher in the December quarter and then higher in the first quarter of next year? And how do you manage that conversation with your with your customers? If that, if that is the case that you've got rising raw materials into next year.
So I'll, take the first half of that. This is Chris. Yeah, I don't think, I think saying the, the California capacity is three times what they're selling domestically in that state. That doesn't sound like a crazy claim to me at all, because California has long been, you talk about sort of the bread basket of America. They have been the cannabis breadbasket of America for the past 30 years. So all the, all the illicit market or the legacy market that continues to exist, a huge portion of that is served by legacy growers in California.
So, it's a little bit of the weird dynamics you get in a, in a market that has, the legal market is bound by a prohibition on your state commerce. The, the legacy market obviously is not bound by those things. So you end up with potentially weird-looking dynamics, unless you just look really just one layer beneath the surface, which is California supplies, a huge lion share of the black market cannabis for the country. And so you, you, you, you got to factor that in now, look at something we expect to change over the next few years as east coast markets get their own legal domestic supply. We expect that, the market will balance a little bit more between the east and west coast, but that's, that has not happened yet.
Okay. And if I let your commodities, I'd say most of our commodities are at multi-year highs, oil, natural gas multi-year highs plastic. We're seeing slowing down a little bit. So that's starting to pause urea is kind of at a nine year high. So if it's going up, it, we don't feel like it can go up a lot more before it flattens out, or at least comes down a little bit.
And so w we're looking at it, it costs to kind of flatten to come down a little bit in our plan. Certainly there's, there's risk to that. And if, if, if costs continue to go up we'll have to look at other actions to try to offset that. But if, if you look at what the customers would be saying, I think they're seeing it across every category different than what we've seen. Historically when, when a cost goes up on a certain commodity, the customers are seeing cost increases across all items in their store, which the consumer is going to have to bear that the whole entire market's going to have to figure that out, but we are not at a disadvantage to the market,
But I just want to throw out that, in the cost of goods part, relative to Hawthorne, if that was where it was focused on, on sort of pricing, I think we're dealing with this is really business to business sales, to professionals who I think understand what's happening in the global supply chain. And that a lot of our products particularly the hard side are more expensive.
But there are a lot of benefits to having them, and it represents the ability to make more money for them and these people, to the extent that I, I do know them it's a very exciting place to meet these generally young people with good businesses that are making good money. And I don't think they look at, our products is, the backbreaker.
I do think on the consumer side, and we've talked about this a couple of times, I don't, we know how the American consumer's going to respond to the cost pressures on pretty much everything that they buy. I personally think it's, it's not healthy. I've said that before and that I don't know, I hope this a lesson than what occurred in Virginia and other states is that I think getting inflation under control and getting supply chain of America fixed is really important because eventually it's going to lead to, I think, issues with consumer's ability to buy stuff.
Now, if we want to talk positively about that ain't our first rodeo. Okay. And when the economy gets barred people still want to buy it, have a nice house and protect the value of their house and the garden when they can't do other things.
We are highly resistant to recession and therefore I don't feel scared about it. I do think that on the consumer side, nobody knows what's going to happen to consumer demand in an environment where you're looking at basically double digit inflation. And I don't think that's an exaggeration. I was down in DC a couple of weeks ago, and every Senator I spoke to numerous senators said, do you think it's transitory? And I said, no.
And I think it's accelerating. And I, so I don't think we know, I think on the Hawthorne side they're professionals, it doesn't represent that YouTube amount, of their, their cost of goods on the consumer side. It's a more worrying thing for America. And I think we're in a good position relative to it. But again, I don't think anybody knows. I think everyone should be concerned. Okay. Thanks very much.
All Mr. King, I'd like to turn the conference back to you for any additional closing remarks.
Thanks Madison. Thanks everybody for joining us this morning. I know there were a couple of folks in the queue that we weren't able to get to just because of time constraints on our side. So feel free to give me a call anytime over the next handful of days, including today 937-578-5622. And for everybody's planning purposes, we are currently tentatively holding February 2 for our Q1 earnings results and conference call. So we will talk to you then.
But hold on before everybody jumps, I do want to throw out there something, I offered to King. I'm sure I'll regret this. I think for people particularly who are interested in the Hawthorne business, we are doing some really good work and I've encouraged to find a way the investment community to actually get a look at what we're up to. Because I think you'd be impressed. And I think it's important to your understanding of our business, that we find some ways to showcase kind of what we're up to so that it's not just a few minutes on a call. It's the real ability to say, I think they're actually changing the game. So I encourage you to ask for it and Jim to do it.
All right, everybody with that, I look forward to your requests and we'll talk to you again on February 2nd. Thanks everybody. Have a great day.
This concludes today's call. Thank you all for your participation. You may now disconnect.