Hydrofarm Holdings Group, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hydrofarm Holdings Group third 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, November 11, 2021. I would now like to turn the call over to Mr. Fitzhugh Taylor, Managing Director at ICR, to begin.

Thank you, Devin. Good afternoon, everyone. With me on the call today is Bill Toler, Hydrofarm's Chairman and Chief Executive Officer, and John Lindeman, the company's Chief Financial Officer. By now, everyone should have access to our third quarter 2021 earnings release and Form 8K issued today after market close. These documents are available on the investor section of the Hydrofarm's website at www.hydrofarm.com. Before we begin our formal remarks, please note that our discussions 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 a more detailed discussion of the risks that could impact our future operating results and financial condition. 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 Tolar. Bill?

Thank you, Fitzhugh, and good afternoon, everyone. During the third quarter, we grew our top line by over 28% and improved gross profit by approximately 65% year over year. We continue to benefit from the reconfiguration of our product portfolio that's been primarily driven by this year's M&A activity, as our proprietary brands have become a larger part of our total sales. This helped drive an improvement in adjusted EBITDA, both on an absolute dollar and on a margin percentage basis. Despite the strong year-over-year growth, our third quarter results were below our original plan, primarily due to a well-communicated short-term agricultural oversupply issue that has put downward pressure on our cannabis growing activity, predominantly in California and Canada. While John will reaffirm our outlook in more detail, we continue to expect our organic growth for the full year 2021 to be between 18 and 23 percent, above the mid-teens historical baseline growth rate we alluded to when we went public last year. We would also note the midpoint of our outlook implies a two-year organic growth of over 75 percent or an approximate 32 percent two-year compounded annual organic growth rate. All in all, we continue to believe our long-term growth algorithm remains strong. and that we are uniquely positioned to capitalize on the unprecedented long-term expansion of controlled environment agriculture. Let me elaborate on this a bit. When we entered the public market late last year, we set a goal to execute on several key growth strategies for 2021. That included innovation and building our proprietary brands, expanding our distribution footprint, adding strategic distribution relationships and more preferred brands to our portfolio. and acquiring value-enhancing businesses, particularly in categories where we didn't already have strong proprietary brands that included nutrients and grow media. To date, we've successfully executed these strategies, as you can see from the following statistics. On a pro forma basis for the five acquisitions we've completed in 2021, now 76% of our year-to-date sales come from either proprietary or preferred brands, compared to 65% last year. And more importantly, our proprietary brands, brands that we own, represent over 55% of our sales versus only about 33% last year. The consumable portion of our portfolio has also grown up to 68% of our total sales, and that's on a pro forma basis, including the five acquisitions. Now 36% of our revenue comes from products that we manufacture in-house. A year ago, that number was less than 10%. And again, that's on a pro forma basis for the five deals we did. We've added several preferred brands, most notably Advanced Nutrients in Canada and Technoflora in North America. And we've grown our combined distribution center and manufacturing footprint by over 70%, exceeding the 25% goal we set out to accomplish earlier in the year. We believe what we've accomplished to date in terms of product portfolio and infrastructure is has positioned our company well to capitalize on the opportunities ahead. As you know, about 40% of the US population live in legal adult use states today. However, within the past year, a number of highly populated states like New York, New Jersey, Connecticut, Virginia, Arizona have passed new adult use legislation, but several of these states have been slower to implement their adult use plans, and we expect to see our volumes build significantly there in many of those areas over you know, some period of time. And while we're not yet prepared to offer detailed guidance on fiscal 22, something we expect to do, we report our Q4 results in a few months, I'd like to touch on briefly our preliminary growth expectations for next year. We currently expect 8% to 10% organic top-line growth for 2022. We also expect organic growth will likely be weighted toward the back half of 22 as our industry lapsed very strong comps in the first half of next year, and several new states build even more momentum as we work our way deeper into 2022. In addition, we expect to benefit from the full year of ownership in 22 of the five businesses we acquired across the last eight months of 2021. Together, we expect this organic growth and the LAP benefit from M&A to take us well above our IPO algorithm of 20% plus growth in adjusted EBITDA. Another area of growth we're excited about is our commercial business. We've grown our commercial business by about 400% in 2021. And with our recent acquisition of IGE and their commercial equipment product range, we are excited with the material opportunity ahead of us on the commercial segment. With that, let me recap our recent acquisition activities. As we mentioned in our last call, we completed our acquisition of Aurora Innovations and Green Star Plant Products in July and August. Then two weeks ago, we successfully completed our acquisition of IGE, or Innovative Growers Equipment, an Illinois-based manufacturer of horticultural benches, racking, and LED lighting systems. IGE also has commercial equipment product range that will complement Hydrofarm's existing lineup of high-performance proprietary branded products. In total, we did five acquisitions during 2021, which have not only provided us with recurring revenue at accretive margins, but have also added valuable manufacturing and distribution capabilities to our business. As we work deeper into the fourth quarter, we will reorient our focus to digest and further integrate these recent acquisitions. In addition, we'll be also putting plans in place to improve productivity, further reduce costs, which we expect we'll need to help offset the ongoing inflationary pressures. Lastly, our recent financing has given us strong liquidity heading into 2022, and we'll continue to use our dry powder to remain opportunistic with our acquisition strategy. In closing, we believe the current oversupply situation is temporary in nature, and we are excited about the expected increase in demand in states that have recently legalized adult use cannabis. Along with a solid portfolio we've built through the five acquisitions this year, as well as improved distribution footprint, we have positioned our company to successfully capitalize on the continued growth in the CEA industry. With that, let me turn it over to John to further discuss our third quarter financial results and provide some further comments on our full year outlook for 2021. John?