Hydrofarm Holdings Group, Inc.

Good day ladies and gentlemen, thank you for standing by. Welcome to the Hydro Farm Holdings Group's second quarter 2021 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, August 12th, 2021. I would now like to turn the call over to Mr. Fitzhugh Taylor, Managing Director at ICR to begin.

Thank you, Stacey. Good afternoon. With me on the call today is Bill Kohler, Hydrofarm's Chairman and Chief Executive Officer. I'm John Lindemann, the company's Chief Financial Officer. By now, everyone should have access to our second quarter 2021 earnings release and Form 8K issued today after market close. These documents are 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 can impact our future operating results and financial condition. Lastly, during today's call, we will discuss non-GAAP 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 GAAP, and reconciliations to comparable GAAP measures are available in our earnings release. With that, I'd like to turn the call over to Bill Teller. Bill?

Thank you, Fitzhugh, and good afternoon, everyone. I'm pleased to report another quarter of strong growth in our business. We enjoyed growth across virtually all of our product lines, all of our geographies, including both new and mature markets. To briefly touch on this, we grew our top line by almost 47% and improved gross profit by over 65% year over year. More importantly, as our proprietary brands are becoming a larger part of our total sales, we benefited from this favorable sales mix and posted over 127% improvement in adjusted EBITDA and a 430 basis point increase in adjusted EBITDA margin to a very solid 12.1% in the quarter. We believe this result is evidence of our unique positioning as a leader in manufacturing and distributing differentiated branded hydroponic equipment supplies in the controlled environment agriculture market. To maintain our momentum going forward, we'll remain focused on our four key growth drivers. First, drive and increase the penetration of our proprietary brands inside our company. Again, these are the brands that we own and represent a key growth opportunity for us due to their higher margin profile. Second, develop strategic relationships to convert more brands into preferred brand status. These are brands that are primarily sold into the hydroponic channel through Hydrofarm. Third, drive our commercial presence by working with our MSOs and large commercial growers. And lastly, which is what I want to focus most of my comments on today, is our M&A strategy. that we believe will continue to create more opportunity to refine our portfolio and improve margin growth and innovation. Following our IPO in December of 2020, we began to reconfigure our portfolio and become a brand owner using our established distribution platform to reach customers. In Q2, we took our first steps toward this goal, but this is a multi-quarter process to buy, integrate, and build these great businesses. It's still very early days in our reconfiguration, but the early results are very encouraging. Specifically, our team has been very busy in the last few months, adding four impressive businesses to our portfolio since the beginning of the second quarter. In early May, we completed the acquisition of Heavy 16, a leading manufacturer and supplier of premium plant nutrients. As a trusted brand with a highly respected team and broader awareness, with availability in over 300 retail stores here in the US. Heavy 16 is an excellent business with a strong foundation of highly profitable proprietary nutrient offerings. In June, we completed the acquisition of another fantastic business, House and Garden. With their own strong product line of plant nutrients, they further strengthen our position in the nutrient category and complement our rapidly expanding portfolio of premium products. In addition, their expansive distribution network reaches 40 states and over 10 countries, and gives us a great opportunity to extend our global reach and market penetration. Subsequent to the end of the second quarter, we completed our third acquisition in Aurora Innovations, an Oregon-based supplier of organic soil, grow media, and nutrient products. Aurora's offerings provide Hydrofarm with its first organic, nutrient, and premium soil brands. In addition, we also gain new domestic manufacturing and distribution capabilities on the east and west coast in the U.S., and a peat moss harvesting operation in Canada. Lastly, last week, we successfully completed the acquisition of Canadian nutrient distributor and manufacturer Green Star Plant Products, a company that we have a long and profitable shared history. Green Star's product line includes Grotech, Gaia Green, EarthSafe, and super green plant nutrients, all of which we believe will further strengthen our lineup of high performance proprietary branded nutrient products. These businesses not only add proprietary offerings into nutrients and grow media categories, where we haven't historically had a strong contingent of our own brands, they also provide great recurring revenue at highly profitable rates and have had a positive impact on our P&L almost immediately. Not to mention they've added valuable manufacturing and distribution capabilities to our business. Let me quickly expand on this with some second quarter statistics. The consumable portion of our portfolio has now grown to approximately 69% up from 67% last year in our product mix. Second, over 68% of our sales now comes from proprietary and preferred compared to 65% previously. And lastly, these accomplishments are only enhanced because of the dedicated people behind it. They have allowed us to recruit many great new talents into Hydroform. I'd like to take this opportunity to welcome all the new team members from the companies we've acquired to the Hydroform family. Together, we can accomplish many great things. To summarize, we consider these businesses to be high growth, accretive, attractive margin profiles that will be accretive to our overall business. But more importantly, these transactions further solidify our position as the acquirer of choice in this highly fragmented and fast-growing industry. So while we're off to a good start in the M&A activities, we still have a lot of opportunities available to us and we'll continue to put our focus behind this strategy going forward. With that, let me shift gears and quickly update you on the investment in our infrastructure. As I've mentioned in the past, our distribution footprint is critical for our ability to better service a larger, long-term customer base and stay ahead of growth. When you couple the recent acquisitions in the past six months with the two distribution centers expected to be completed in Q3 of this year, we will have grown our combined distribution center and manufacturing footprints by approximately 70%. As we look ahead over the next few months, we'll be moving into two new distribution centers, one in Northern California and one in Southern California. In fact, we move into Southern California a bit this week. You may remember we also expanded our Portland, Oregon facility earlier this year. These new facilities are all larger and located in better areas logistically. Lastly, we're finalizing our plans to add an additional center for distribution in the next six to 12 months. If you'll recall, it was our goal to expand our distribution footprint by about 25% this year, and as you can see, we're well on our way to exceeding that goal. Finally, let me remind you, we're still in the early innings of a long progression to full legalization. It's still there over 60% of the U.S. population that resides in a state that does not have access to legal adult-use cannabis. I truly believe the legislation is at a tipping point, and the investments we are making in our infrastructure today will position us to serve the expected surge in adult-use cannabis demand. Before I turn it to John, let me reiterate how excited we are with the long-term growth potential of the CEA industry and the fact that Hydrofarm is uniquely expected to capitalize on that growth. To that end, we'll continue to grow our organic top line, execute on our proprietary preferred brand strategies, drive our commercial business, and capitalize on the many opportunities we have in M&A to build a strong portfolio of proprietary branded offerings. With that, I'll turn it over to John for a little more update on the financial results and important update on our 2021 guidance. John?