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?

Thanks, Bill, and good afternoon, everyone. We are pleased with our fourth quarter results and the significant growth opportunities ahead. Now for a brief walkthrough on the quarter. Let me start with net sales, which increased 62.6% to $87.4 million in the fourth quarter of 2020, from 53.8 million in the prior year period. As noted in the earnings release, our top-line growth was dominantly volume-driven, and I should add it was both broad and diverse. Though we grew in virtually every geography that we served, several states, including Oklahoma, Oregon, and California, saw year-over-year growth in the quarter far in excess of the 62.6 we achieved on a consolidated basis. Growth in the quarter was also strong across proprietary and preferred brand groups, such that we finished the full year 2020 with proprietary plus preferred brands up meaningfully and together representing just over 60% of our total sales. While we are pleased with the progress made in 2020, we anticipate a further favorable sales mix shift in 2021. In the quarter, we also saw gross profit nearly triple to $16 million in the fourth quarter compared to the same period last year. And gross profit margin improved to 18.3% from 10.2%. The dramatic year-over-year increase was driven by a combination of items, including the higher sales and more favorable sales mix described earlier, but also resulted from inventory adjustments and write-offs in connection with the skew rationalization that negatively impacted the fourth quarter of 2019. While we are pleased with the overall 800-point improvement in gross profit margin, I should note that we did realize higher freight costs in Q4 than we had estimated at the beginning of the quarter. So naturally, we are keeping an eye on freight as well as product costs as we move into 2021. Selling general administrative expenses, SG&A, was $21.4 million in the fourth quarter of 2020 compared to $13 million in the fourth quarter of 2019. The largest portion of the increase in SG&A was related to incremental stock-based compensation expense triggered by our IPO in December. For those of you who read the IPO prospectus, you will recall that we estimated this amount at 8 to 9 million. And indeed, we came in roughly in the middle of that range. Excluding stock-based comp and depreciation amortization expense, SG&A was 11.2 million, or 12.8% of net sales in Q4, versus 11.1 or 20.7% of net sales in the prior period. So on this comparative basis, we realized significant operating leverage in 2020 relative to 2019. And this is another metric we intend to further improve in 2021. Net loss for the fourth quarter was $10 million, or $0.43 per diluted share, compared to net loss last year of $17.7 million, or $0.86 per diluted share. Weighted average diluted shares outstanding were approximately $23.1 million for the fourth quarter of 2020 and approximately $20.7 million for the prior year period. Please also note that neither share count reflects a full quarter impact of our IPO, which closed in mid-December 2020. To account for the IPO and its changes to our capital structure, we have calculated pro forma adjusted net income and applied pro forma weighted average diluted shares outstanding, as if the IPO had occurred at the beginning of January 2019, which is the earliest comparison period. The precise calculation is detailed in our earnings release on the page containing the reconciliation of non-GAAP measures. We believe the additional information contained in this non-GAAP measure can be helpful in comparing prior periods. And on that basis, pro forma adjusted net income for the quarter was approximately $0.5 million or two cents per diluted – per pro forma diluted share compared to a loss in the fourth quarter of 2019. Lastly, adjusted EBITDA increased $10.6 million to positive $5 million, or 5.7% in net sales, for the fourth quarter of 2020 from a loss in the prior year period. The increase relates to higher sales, higher gross profit margin, and the leverage on SG&A all described earlier. 2020 was a big turning point for the company in a number of ways, and we believe our adjusted EBITDA is reflective of this fact. Moving on to our balance sheet and overall liquidity position. As of December 31, 2020, we had $75.2 million in unrestricted cash and cash equivalents and only $1 million in total interest-bearing debt outstanding. This strong capital position at year-end is further enhanced by our new credit facility. Just yesterday, we signed and closed on a new $50 million revolving credit facility, which can expand to $75 million upon our request. While we enjoyed a very good relationship with our prior lender, our new JPMorgan Chase credit facility carries numerous advantages, including a lower effective borrowing rate, a more favorable borrowing-based calculation, a provision for permitted acquisitions, and added flexibility with respect to our advertising and marketing practices. We are really excited to begin this new credit relationship. To complete the overall conversation on liquidity, I should also point out that in addition to our balance sheet cash and our new credit facility, the company also anticipates receiving as much as $56 million, and additional equity capital from the future exercise of investor warrants by the investor warrant holders. As further described in the IPO prospectus, the company has the right to call the investor warrants under certain conditions. Further, we do not expect that investor warrants are likely to be exercised until such time as the company files a registration statement to register the common stock underlying the investor warrants. Finally, it's worth noting that we do have some element of control over the timing of the exercise of these investor warrants. Before we open up the lines for questions, let me quickly review with you our 2021 outlook. As Bill noted earlier, we are off to a strong start in 2021. And in fact, we expect our Q1 sales growth rate to be similar to the growth rate we just experienced in Q4 2020. Based in part on this strong start, we are now estimating organic net sales growth of 20% to 25% for the full 12-month period ending December 2021 and adjusted EBITDA of $28 million to $31 million for that same period. Given my earlier comments, you can tell we expect stronger growth in the first half of 2021 relative to the second half, as we begin to last particularly strong comparable periods from 2020 in the third and fourth quarter. We expect our 2021 growth will be dominantly volume-driven in conjunction with the broader demand themes in the CEA industry, though we do anticipate that commodity cost inflation may result in some price increases across the industry during 2021. We anticipate that our initiatives to drive sales mix by increasing the proportion of our proprietary and preferred brand sales and continuing to drive operating leverage on our SGN expenses will result in adjusted EBITDA margin expansion as implied by our guidance. Lastly, let me touch on a few select assumptions in our 2021 outlook, several of which relate directly to Bill's earlier comment about investing in our platform. First, as you heard, we are now planning a more aggressive DCE footprint expansion in 2021 than previously contemplated, which means that we are estimating additional facility expenses this year of approximately $2 to $3 million, comprised primarily of incremental building rent lease expense. This investment, of which approximately half is expected to impact the 2021 P&L, should put us in front of the growth we see coming, both in terms of pure organic volume growth but also the extra space needed to speed and ease the integration of any future acquisitions. Second, I should note one expense item we did not call out in the earnings release, and this is additional public company costs of one to two million. With the value of our public float increasing significantly from our IPO price, we may now need to be fully SOX 404 compliant in 2021, which may result in incremental consulting and audit expense, which we have now built into our 2021 plan. And finally, our planned capital expenditures of approximately $3.5 to $4.5 million cover growth-oriented capital for the distribution facility expansion effort referenced earlier, as well as IT-related spend to enact further scale benefits inside our existing IT system. As you can see, we remain excited about the magnitude of the opportunity in front of us, and we look forward to reporting on our progress as we execute against it. This concludes our prepared remarks, and we are now happy to address any questions you may have. Operator, you want to open up the lines for questions?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may also press star 2 if you would like to remove your question from the queue. One moment, please, while we now poll for questions. Our first question comes from Andrew Carter with Stiefel. Please proceed with your question.

Hey, thanks. Good afternoon. I wanted to hone in on the input cost inflation kind of questions and maybe also, I guess, to start, are you looking, are you still expecting kind of gross margin expansion for the year? And a couple of ways that the input cost might affect. Number one, difficulty out in China. Are you building more inventory because of that?

and on as far as your non-exclusive brand are you having to absorb some pricing will there be any delay impact margins i guess i'll stop there yeah thanks andrew i'll jump in on that one and then bill can add some color if you'd like um you know a couple things i mean first the the two things i think we really hone in on in this area is just free cost and transportation costs given the distribution nature of our operations and product costs right from a freight perspective You know, we are looking to lock in and have locked in our LTL rates with carriers that really help mitigate any cost increase there. We think we've roughly covered about half of our freight costs for the year in that manner. Obviously, we don't control fuel costs, and so, you know, we, like everyone, will be dealing with that. From a product cost perspective, it's a little harder for us, given the broad nature of our SKU set. meaning thousands of different products and the fact that we're primarily a distributor today purchasing finished goods. What we do do is we take inventory positions that may be two to three months worth on average and a large number of SKUs. But for some SKUs, we'll take a slightly longer position to lock in otherwise rising costs or to make sure we have ample supply should transportation delays come into the picture. So that's really the way in which we try to manage it. Obviously, the third piece of it, of course, which I referenced in the in our notes, in our conversation earlier, is just how we handle pricing as an industry. And, you know, I think, you know, to the extent we see continued rising costs, we may see some of that across the industry.

Got it. And then second question, I guess the input cost inflation environment might feed into it because it might catalyze the acquisition opportunities. Or I guess, conversely, you know, since you've gone public and obviously, you know, done very well. Has that made the conversations harder with potential targets in terms of putting stars in their eyes or anything like that? Or is that kind of that excitement kind of pre-IPO still there? Thanks.

Yeah, good question. I think certainly what's gone on in this space with us and GrowGen and some of our competitors all trading very well, people are very excited about the space. And I think that In many ways, it's brought a cottage industry more into the prime time, and so people are anxious to be a part of that. I think a lot of folks in these smaller businesses are saying they see the benefit of being a part of a bigger platform, and we're working through how that looks with folks. But, yeah, I mean, people certainly now think that their business is worth what they probably always thought it was worth, and now there's something to validate that. So there's a little upward pressure on prices paid, but there certainly is no lack of good opportunities out there. And because it's such a fragmented industry, Andrew, there's a lot of different choices. So if somebody's being unreasonable, you move on to choice number two or choice number three. And there's a lot of opportunities to find good brands that can add into the portfolio.

Thanks. I'll pass it on.

Thank you.

Thank you. Our next question comes from Bill Chappell with Truist Securities. Please proceed with your question.

Hey, Bill. Hey, thanks. Good afternoon. I guess first question, looking at the fourth quarter, it's really strong and stronger than we'd expected, but was there anything left on the table, I mean, in terms of capacity constraints and meeting orders, or do you feel like you're fully caught up now?

No, we left a bit on the table, particularly in lighting. We've gotten our photobios in, but they came in a touch in October, but they really came in earnest in Q1, and so we think we're now catching up to that. And on a category-by-category basis, I would say that lighting was actually one of our weaker categories in Q4, and we hope to recover that and keep building from here.

Well, and can you talk a little bit more about photobio? Because I guess my understanding is the new technology is one where a lot of existing customers are willing to throw out what they've bought just in the past year or two years and have a full refresh because it's just that worth it. And so, I mean, is this a pretty – Maybe give us a little more color on what this means in terms of lighting sales over the next few years.

Yeah, we think that we are now very well positioned with the Photobio product. We actually spent a couple of years working on it and have now got a product that tested out very well in terms of the actual performance of the brand and the actual sort of impact against competitions. I think we're now at a good spot there. And, you know, our folks are out selling it both into our retail store partners as well as into our other relationships and places. But, you know, PhotoBuy is a great brand, a great opportunity for us to take the Phantom brand, which has been our 10-year leadership brand in the lighting category, and really expand it and take it further. So we think we now are in a very good spot after, you know, having some challenges with last year, of course, COVID and other things slowed down the development. But now we're where we want to be.

Got it. And then last one, just again, nothing wrong with your guidance and certainly above what we were looking for, but is there something you're seeing now in terms of orders as we move to the back half where you think there's a slowdown or a cooling, or is it just numbers and comparisons that you're looking at right now and it's too early to tell?

A little bit of that latter part, Bill. You know, you're We started out the year fairly slow last year, up about 20, and then up 40 in Q2, and then over 60 in Q3 and Q4. So we're going to lap pretty strong early, and then we start lapping those plus 60 quarters in Q3 and Q4, and that's pretty daunting at this point. As we've said all along, we're going to try and be conservative but smart about it, and as soon as we see something, we'll call it and bring it out. And right now, we feel very good about the Q1 momentum. And that's why we're kind of moving that number from at least 20 to 20 to 25, which is an improvement. But we're not ready to go beyond that yet until we see a little more momentum. And we're all starting to lap the sort of the heaviest COVID, I would call it a little bit of forward buying, if there's such a thing in this industry. Last year where everybody bought really heavy sort of in mid to late March and early April, and none of us were sure a year ago what would happen. So the absolute year-on-year here in this two- to four-week period is a little different. But I think it's going to smooth out. You'll see a very, very strong Q1, Q2. And, you know, hopefully Q3 and Q4 will keep going as well.

Great. Thanks so much.

Thanks, Bill.

Thank you. Our next question comes from Kevin Merrick with Deutsche Bank. Please proceed with your question.

Hi.

Good afternoon.

Hey, Kevin. So the EBITDA margin guidance is up 80 basis points. I think it's a midpoint from 2020 levels. I'm wondering, you know, just to take a step back, if you can talk about, you know, the big moving pieces of that improvement and then whether you think that improvement is sustainable as we look out over kind of a multi-year period based on those pieces and the size of them.

Yeah. No, thanks, Kevin. I mean, really the two main drivers continue to be the two topics I think we've we've tried to stay on course on. And one is just the shift in the product mix. Our proprietary and preferred brands, as we've spoken about earlier, tend to carry a natural higher margin. We made some improvement on that in 2020 over 2019. We think there's opportunity, even without acquisitions, for us to continue to affect that and really drive our gross margin up. The other piece of it really is the operating leverage on SG&A. And when I speak about SG&A, I'm really talking about S&A excluding depreciation, amortization, and the stock-based comp. We do think there's some incremental leverage in 2021 relative to what we experienced in 2020. That's also implicit in the adjusted EBITDA margin improvement you see. You know, I would say, and this is part of the reason we called it out in our prepared remarks, is, you know, we are making some incremental investment in 2021 that will have benefit over the next few years, we believe, particularly with the additional DC space. So all things that we think are positive on that front. And by the way, we do think, I'm sorry, the last part of your question, I think as we thought about margins longer term for our business, excluding acquisitions, we've kind of targeted this 8% to 10% EBITDA margin range as an area that we think we can fairly quickly work our way up into. So I think that hopefully that frames out the back end of your question.

Yes, that's helpful. Thank you. And then I guess, you know, as a follow-up, I think you talked about proprietary preferred brands being just north of 60% of sales in 2020. You know, do you guys have a target or an expectation for 2021 or maybe going further out, however you're kind of able to answer the question, just trying to think about how to frame it?

Yeah. No, I mean, look, well, this is a number that's a sensitive one to us from a competitive standpoint. I tell you, You know, we moved from something that was below 60 to something north of 60, and as we look into 2021, we're right now targeting sort of the mid-60%, 60% to 70% area is really the zip code we're looking to land in. You know, we do think, you know, I always should mention this, with acquisitions, that could change that dramatically. Everything I'm talking about is without acquisitions.

Understood. I'll get back to you. Thank you.

Thank you. As a reminder to our audience, if you'd like to ask a question, please press star 1 on your telephone keypad. Our next question comes from Andrea Teixeira with J.P. Morgan. Please proceed with your question.

Thank you. I think if you can, just I have two questions for you. If you can elaborate more what's embedded in your guidance for the additional states legalizing adult use cannabis and cultivation. If I can recall correctly, you had said it was obviously multiples higher per capita consumption in those states against the non-legal states. So I'm wondering if you can share the typical timeline that you see for the increased consumption there. And also, if you can talk a second question, sorry, Bob, just on the DMI platform. So if you can comment on the commercial customers and how you're seeing that evolving over time from the 10%. Sure.

Yeah, thanks, Andrea. On the newly legalized states, you've got four with adult use. We're seeing some early sort of high percentage increases at relatively small dollars out of Arizona. They've been the one that's been the most aggressive about trying to implement literally in the first few months of 2021. New Jersey and some of the others are taking a little longer to sort out the way they're going to implement, so we haven't seen as much from there. So there really isn't a ton of explicit volume planned in our guidance for the new states, right? We learned that, you know, it used to be 12 to 18 months before you'd see them come into the volume picture. Now it's more like six, nine, or 12. But we try not to get ahead of ourselves and plan them in. We're really talking the guidance is mostly run rate, and it's mostly sort of momentum in the business. And a lot of that, to your second question, is driven by our traction in commercial. You know, we've been adding, call it a handful of commercial customers a week, and we've got now, you know, a very good number of them. Many of them are moving on to the DMI platform to get that scheduled delivery, that just-in-time inventory, that you know, take supply chain out of their hands, allow us to be the partner to do that. They worry about growing and marketing and selling. We worry about helping them with the supply chain. That's been a very, you know, formidable tool for us to use to work with these commercial customers. So, yes, that is moving along, Andrea, on that percentage. It's certainly above the 10% as a total commercial group right now, and DMI is a nice subset of that.

Yeah, that's wonderful, Bill. Thank you. I'll pass it on.

Thanks for your help.

Thank you. Our next question comes from John Anderson with William Blair. Please proceed with your question.

Good afternoon, Bill and John.

Hey, John.

Congratulations. Congrats on a strong quarter right out of the gates.

Thank you.

I guess maybe I'll pick up where Andrea left off on commercial customers. Can you talk a little bit about what it takes from a capability standpoint to serve maybe commercial customers? Are the requirements different? Are they more kind of high touch? Are there different capabilities that you need to have or build to scale that part of your business over time and how far along you feel you are on that aspect today?

Yeah, I would think we're probably half to two-thirds of the way there. We still don't have what I would call the full suite of services and offerings that we could or should have in that area. We're developing them pretty quickly, and I hope to have them done over the next few quarters. But, yeah, it is a different cell. It's much more of a strategic and consultative cell with layouts and larger equipment and HVAC and larger systems pieces going in there versus what goes into our our retail store environment and so you do work with them in a different way it's also a longer sales cycle I mean generally take you know several months to work through either a new commercial build or if you're switching on from a different different supply situation it takes a good while to do that so it's a very different kind of sell it's taken us a while to build the team and the capability because hydro farm historically was very very retail oriented and you know, for really its entire 40-year, you know, plus history. So, yeah, it's a good question. There are a number of things that are different.

But it really sounds like you feel pretty good about not only, you know, that you're moving in the right direction there capability-wise, but it's translating into new relationships, as you pointed out, on a kind of a weekly, monthly basis.

Yeah, it is, John. I'm never satisfied with very much, but I'm always encouraged by the progress we're enjoying, and so I'm anxious for us to do a lot more here. I think that there's just a huge world out there that we still are learning how to address, and we are addressing it, but there's just a lot more to do. And I will tell you, on the flip side of that same coin, we're seeing incredible growth and traction in our retail stores all across the country, not just in newly legal states, not just in you know, emerging states, but frankly, in almost every type of geography, the independent market sort of, you know, serving that hobbyist, if you will. I think that TAM, that total addressable market is far larger than any of us ever thought. And that's one of the reasons we're seeing such incredible numbers out of anybody, all the people in this category is that the retail stores are growing, the commercials are growing, the new states are building out all that speaks to this market is probably a lot larger than any of us can really measure. And it's a lot of fun to go, to go take it on.

Agreed. Agreed. I was, um, to that point, it was interesting in the prepared commentary to hear that. I think Oklahoma, Oregon, California, all grew for you at a rate in excess of the 63% company wide. And those are states that have been legal for a while now. So what are you seeing there that continues to drive such strong growth? I mean, in California, where we've been legal for several years now.

Yeah. I mean, in California specifically, I think you're seeing two ends of the spectrum. You're seeing that the hobbyists now very comfortable they can grow and not be bothered by any other outside influences. And you're seeing the commercial side, many of which are shifting away from from high-pressure sodium lighting back into LEDs. You're getting almost a renewal of some equipment, plus you're getting the retail store growth. You're getting both into that. We didn't quote exact the numbers you said, but what we said was that Oregon, California, and Maine, states that are all five years or greater, are all growing very, very rapidly, even though they've been around for a while. You mentioned Oklahoma. Oklahoma is truly the wild, wild west. That's been one of the fastest growing states fastest growing states for us and I think for the entire industry and it's also you know sort of in our top you know top group of states in absolute size and Oklahoma isn't oftentimes in a top group but it is in this category and we have a lot of a lot of folks out there working hard yeah it's interesting last one for me on the kind of some of the revisions that you're making to your plans for your footprint

obviously it's related to demand, probably expectations moving up. What can you tell us about a little bit more color around what you're doing there, when it will take effect, and is it more oriented towards just trying to keep up and satisfy demand, or is there also a service element in the sense that you can, you know, get to market faster or support your DMI customers, et cetera. Thank you.

Thank you, John. It's really demand and expectation of M&A, right? Demand, first of all, we've already moved our Portland, Oregon facility to a bigger facility. We're in the process over the next three months of moving our Northern Cal facility a few miles east into a larger facility and a newer one, Santa Fe Springs, L.A., where John and I are today. We're moving that into a larger facility. That's mostly demand and M&A expectation driven. In the east, when you've got New Jersey and now New York going probably in the next X number of months, we're going to open up another DC to take some pressure off that because we have a great facility right outside of Philadelphia. But to service those big markets, we're going to need to take some pressure off that facility with a support probably in the southeast. So that's the footprint that's evolving. But it's really purely demand and the expectation that we'll be bringing some businesses in as well. Thanks so much. Congrats again. Thanks, John.

Thank you. Our next question is from Andrea Teixeira with J.P. Morgan. Please proceed with your question.

Thanks for taking my follow-up. So you touched on this earlier, but if you can talk a little bit more about the cadence of the quarters, if we should expect some lumpiness in the June and September quarters. And also, like you also mentioned that, I want to make sure that we all understood it correctly. In terms of your supply chain of the lights that come from China, you're comfortable that you don't see any major disruptions there going forward?

Yeah, I'll take the lighting, and then John can comment on the cadence. But Yes, we have leaned into inventory on lighting, our much stronger balance sheet and company position post-IPO has given us that flexibility and ability. And so we have lots of lights to sell, lots of lights on the way, and are excited about having the inventory and also about the results we're seeing in the market. So very solidly in good place there. The categories, frankly, we're still catching up on inventory are mostly the grow media suppliers to us, and in some cases the nutrient suppliers, and many of them are just coming off such strong years last year that they're still trying to catch up. So that's the category that we probably left a little bit on the table there, and now hopefully we'll have our own brands in stock on the lighting side and equipment side, and hopefully these guys will be able to catch up pretty soon.

Yeah, and just the first part of your question, I'll kind of address it two ways. One is just from a rate of growth perspective on a year-over-year basis across the quarters, and this is maybe a little bit of a reference to my prepared comments, but we are expecting faster or higher growth in the first half of the year and more moderated growth in the second half of the year. And I think as and when we evolve across the span of the year and see something that suggests we should call out a change on that front, we won't hesitate to do it. In terms of just absolute dollars, Q2 and Q3, we do expect to be a little bit higher than Q1 and Q4, not dissimilar to what you've seen from us over the last two fiscal years on that front.

Super helpful. Thank you.

Thanks, Andrew.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to Bill Toler for any closing remarks.

Great. Thank you all, folks. We appreciate you being a part of our first call and look forward to being back in touch soon. Take care. Thank you.

Ladies and gentlemen, this concludes today's web conference. You may now disconnect your lines at this time. Thank you for your participation and have a great day.