Hydrofarm Holdings Group, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hydrofarm Holdings Group fourth quarter 2020 earnings conference call. At this time, all participants have been placed in a listen-only mode, and the lines will be open for your questions following the presentation. Please note that this conference is being recorded today, March 30th, 2021. I will now like to turn the call over to Mr. Fitzhugh Taylor, Managing Director at ICR to begin.

Thank you, Victor, and good afternoon, everyone. With me on the call today is Bill Tolar, Chairman and Chief Executive Officer, and John Lindeman, Chief Financial Officer. By now, everyone should have access to our fourth quarter 2020 earnings release issued today after market close. If not, it is available on the investor section of Hydrofarm's website at www.hydrofarm.com. Before we begin our formal remarks, Please note that our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our recent SEC filings for more detailed discussion of the risks that could impact our future operating results and financial conditions. Lastly, during today's call, we will discuss non-GAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAP, and reconciliations to comparable GAP measures are available in our earnings release. With that, I'd like to turn the call over to Bill Tolar. Bill?

Thank you, Fitz. Good afternoon, everyone. It's great to be speaking with all of you on Hydrofarm's First earnings call as a public company. We enjoyed a very successful IPO in December and are pleased to be with you today to update you on our progress. We'd like to cover several topics on today's call. I'm going to begin with our financial highlights, provide a brief overview of Hydroform's key business strategies, and discuss why we believe we are well positioned for long-term growth. John will review our fourth quarter financial results in more detail and update you on our current full year 2021 outlook. After that, we'll open up the call for questions. We are pleased to cap off a successful 2020 with Q4 top line growth of over 62%. In fact, our rate of growth in 2020 increased sequentially across each of the quarters, largely in connection with our team's effort to rebuild and restock our inventory positions following extensive supply chain delays many industries felt during COVID. Our strong growth in 2020 was broad and diverse as we realized growth across all of our product lines and across our proprietary, preferred, and distributed brand categories. We were also pleased to see growth in essentially all the geographies that we serve. During 2020, we also implemented several management initiatives to significantly enhance our profitability. This is best shown by the dramatic increase in our adjusted EBITDA, which increased over $21 million in 2020, representing an improvement of over 1,000 basis points as a percent of net sales compared to the prior year. Our team at HydroPharm accomplished all of this in 2020, while also grappling with many challenges presented by COVID, such as working remotely, restocking inventory in a challenged supply environment, and doing our part to keep our teammates, customers, and communities safe. And while I'm very proud of what our team has accomplished, I'm even more bullish about the future, both near-term and long-term. Let me share with you a few growth drivers that have me excited about the opportunity here at Hydrofarm. First, the category dynamics are quite favorable, and Hydrofarm's sales momentum reflect that upside. Many of you know that Hydrofarm is one of the leading distributors and manufacturers of hydroponic equipment supplies, serving the fast-growing Controlled Environment Agriculture, or CEA, markets. Quite simply, our products make indoor growing and cultivation of fruits, plants, and vegetables more productive. Our products enable customers to control key farming variables, including temperature, humidity, CO2, light intensity, color, and nutrients. This, in turn, delivers greater yield from their crops while doing so with a more efficient land use, better freshwater conservation, lower fertilizer and pesticides use, and virtually no chemical runoff. And the CEA category, I believe, is still in the early innings of a sustainable and significant growth curve brought on by number one, ongoing legislative changes here in the U.S., number two, innovation, technology, and brand power within the category, and number three, ESG initiatives, which over time help extend the impact of these highly efficient farming practices. In fact, during the recent November 2020 elections, there were significant legislative actions that should spur further demand for our products, such as the passage of adult use cannabis in several new states, including Arizona, New Jersey, Montana, and South Dakota. And most recently, just last week, state lawmakers in New York finalized a plan to legalize adult use cannabis there as well. While each state is still finalizing their individual implementation plans, we are expanding warehouse capacity in several key markets and building inventory to serve the expected surge in demand. And I should remind everyone that even with the recent actions of these new states, still almost 60% of the US population resides in a state that does not have access to legal adult use cannabis. Lastly, the new states will add substantially to our CEA customer base. In 2020, we realized significant growth in some of the more mature adult use states like California, Oregon, and Maine. all of which passed adult use legislation more than five years ago. These dynamics and our own company performance propelled greater than 60% top line growth in both of the last two quarters of 2020. And I'm pleased to say our sales momentum at the start of 2021 has continued at a very strong pace. Second, we are committed to innovation and brand building, which will continue to drive our growth. Innovation and brand building, particularly around our proprietary brands, the brands that we own, represents a key growth opportunity. We have a little more than 60% of our sales in the combined categories of proprietary and preferred brands, the bulk of which is proprietary. And we look to build on that number going forward. Proprietary brands drive better margins and provide more control over our own destiny, and therefore we are squarely focused on increasing their penetration. A great example of this innovation-driven growth in our own brands is our new Photobio LED lights by Phantom. Developed by our in-house product development team and extensively tested by third parties against all key competitors, our photo bio lights outperform the competition across key product attributes. Our sales team quickly mobilized behind the new photo bio brand and we're seeing excellent traction in the marketplace. This is only one example, but it gives you some insight of the approach to innovation and brand building, something that many of the folks in the leadership team here at the farm have focused on across their entire careers. The third element in our growth strategy is to add strategic distribution relationships and preferred brands to our portfolio. Through our company's 40-plus year history, Hydrofarm has taken pride in strategically aligning with powerful brands in the industry in a symbiotic way, what we refer to as our preferred brands. Over the last few years, we've added key partners like Fox Farm, Aurora Innovations, Anden, Aptis, and others to our preferred portfolio. More recently, in February this year, we announced an exclusive distribution agreement in Canada with Advanced Nutrients, one of the largest, most prospective nutrient brands in the CEA space. The fourth pillar in our growth strategy is to acquire value-enhancing businesses. For those of you that we met during our roadshow or who read our IPO perspectives, you know we have a keen interest in acquiring value-enhancing businesses. Coming out of the IPO, we are now well-capitalized. and have an internal team that is well-constructed to help us acquire businesses. Between myself and John and our head of corporate development, we have done over 100 M&A transactions combined in our careers. And while we are open to opportunities across the entire CEA spectrum, our top priority is to buy businesses in the product categories where we don't already have strong proprietary brands, namely nutrients and grow media are two of those categories. We have built a strong M&A funnel of potential targets and hope to have something to tell you about before mid-year. Many of these businesses carry EBITDA margins that are accretive to ours, so we think this is a viable strategy for us moving forward, and we look forward to updating you on our progress. As we pursue the growth strategies outlined earlier and benefit from the rapid growth in our industry, we're also reinvesting in our own infrastructure. In 2021, we expect to expand our distribution footprint by about 25%, by adding a new DC and relocating and expanding existing facilities. Though our existing footprint can handle a business with our expected organic size in 2021, we want to stay ahead of the growth that we see coming and position our company to better service a larger, long-term customer base. We're also making preparations in all parts of our operation to position Hydroform platform for acquisitions, integration, and robust organic top-line growth. I'll rejoin in a moment for Q&A, but let me turn it over to John to further discuss our fourth quarter financial results and provide some more shape to our 2021 guidance. John?