Hydrofarm Holdings Group, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hydrofarm Holdings Group fourth 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, March 1st, 2022. I would now like to turn the call over to Mr. Fitzhugh Taylor, Managing Director at ICR, to begin.

Thank you, Maria. Good afternoon, everyone. With me on the call today is Bill Toller, Hydrofarm's chairman and chief executive officer, and John Lindeman, the company's chief financial officer. By now, everyone should have access to our fourth 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 form release, 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-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 Toller. Bill?

Thank you, Fitzhugh, and good afternoon, everyone. We're pleased to cap off a successful 2021 with a fourth quarter that included revenue growth of over 26%. While our Q4 was impacted by the previously discussed short-term agricultural oversupply of cannabis, when you take a step back, there's no doubt we have made significant progress reconfiguring our portfolio during the year to further establish Hydroform as a leading branded manufacturer and distributor within the fast-growing controlled environment agriculture industry. and we believe we've set the company up for long-term success. Let's recap some of the highlights of the full year of 2021. We posted total growth of over 40% in 2021 via significant organic growth plus acquisition-related growth. Our organic growth was over 18% for the year, very much in line with our long-term historic growth trends. I would also note that on a two-year basis, Our full-year organic growth was over 72% in aggregate, or about 31% on a compounded annual growth basis. This represents a period of strong expansion in the industry with growth rates a little above our long-term historic norms. Secondly, we successfully completed five acquisitions in 2021 that helped to reshape our product portfolio. As a result of these acquisitions, on a pro forma, Full year basis, 77% of our sales come from proprietary and preferred brands compared to just 66% last year. In addition, on a pro forma basis, the consumer portion of our portfolio is now about 68% up from 65% last year from a product mix standpoint. And more than half our sales now come from our own brands. And we produce, manufacture in-house, about 40% of that revenue. up from only 10% a year ago prior to our acquisitions. Third, we successfully completed three financings in 2021 to enable these acquisitions and better position our balance sheet given the substantial increase in size and scope of our business. Fourth, we relocated and expanded several of our distribution centers, which on a combined basis with our recent acquisitions had the effect of increasing our distribution and manufacturing footprint by over 500,000 square feet, representing an increase approximately 70%. And finally, we also took numerous actions across the year to strengthen the Hydrofarm platform and team by successfully adding important leadership roles, organizing our ESG effort, and publishing Hydrofarm's first sustainability report, and by bringing our internal controls environment into full SOX compliance in our first year as a public company. Again, these actions redefined our product portfolio while adding more manufacturing to the value proposition. We bring our customers and importantly improve our overall level of profitability. And perhaps most important of all, these accomplishments better positioned us to capitalize on the continued long-term expansion of controlled environment agriculture in the U.S., in Canada, and in locations around the world. With that in mind, I'd like to touch on some of the growth drivers that we believe will benefit our business in 2022 and beyond. First of all is our IGE acquisition, the one we completed last, back in November of 2021. Currently, IGE is carrying significant backlog with customer deposits on our commercial accounts, driven by new state build-outs and vertical rack retrofits. Coupled with their new manufacturing capability and strong line of customized CEA's solutions for commercial growers. We believe this will benefit us as the year progresses. That brings us to our commercial channel. In 2021, we continued to successfully build out our commercial sales channel as we tripled our sales from the previous year of 2020. And we're pleased with the strength we are seeing in the commercial segment across the U.S. as we enter this year. Combined with the sales efforts of our acquired brands, we believe this momentum is sustainable and will present us many new opportunities going forward. Another exciting driver in our business are our peat products, peat moss. A segment of Aurora Innovations, which we acquired last June, experienced record sales in 2021. And we recently secured additional bog leases, allowing us to expand our acreage by over 70%. While we expect this expansion to give us some benefit in 2022, we believe we'll fully realize the benefit of that in 2023, and we're very excited about the future of this subcategory. Next in the fourth growth driver is adult use legislation. In 2021, approximately 75% of our sales come from established adult use states, with only 20% of our sales coming from medicinal states and only 3% from the new adult use states. As a result, as these new adult use states build out, we have tremendous opportunities for growth as we see these medicinal states convert over to adult use and get fully implemented. New legislation also continues to be an ongoing opportunity for us as recent and upcoming legislation in numerous states provide ongoing growth potential for our business. While some states have been slow to implement their adult use plans, We expect volumes to build significantly in many of these markets in 2022. All in all, we expect continued acceleration in the cannabis market growth resulting from these state legislative changes and increasing popular support. Finally, in late 21 and early 22, we took further action on several pricing and cost-saving initiatives. On the pricing side, we continue to push through cost increases where necessary and appropriate. And on the cost-saving side, I'll note by the end of the first quarter of 2022, we will have reduced our employee base by about 11% as we start to capture some of the cost synergies from the five acquisitions completed in 2021. We believe these changes are necessary and will be helpful to reduce costs and help mitigate the impact of inflationary pressures. In closing, we remain excited about the long-term outlook for our business. During the past year, we successfully completed to make great progress in integrating five acquisitions to further strengthen our portfolio. We're expecting increased consumer demand from accelerating legislative support, and we have a very unique portfolio as a leading picks and shovel supplier to the industry that doesn't touch the plant. In addition, we have a very healthy balance sheet that can support future growth. And while the industry is going through some short-term headwinds, we are very well positioned and have plenty of reasons to be positive in 2022 particularly as we look towards the second half of the year. With that, let me turn it over to John to further discuss our fourth quarter financial results and to provide comments on our full year 2022 outlook. John?

Thanks, Bill, and good afternoon, everyone. Net sales for the fourth quarter increased 26.3% to $110.4 million from $87.4 million in the prior year period. The increase in net sales was related to the year-over-year impact from the five companies that we acquired between May and November. Together, these acquisitions added 40% to our top line in the fourth quarter of 2021 relative to the prior year period and offset a decline in organic sales, which was impacted by softness we experienced in several U.S. states, though most prominently in California and in Canada. Though we experienced organic growth softness in Q4 in several markets, we did see several other states that more recently passed adult use legislation build some momentum. In particular, we experienced more than 100% growth rates in the quarter in New York, Missouri, Louisiana, Arizona, and Virginia, as well as strong growth in several less mature cannabis states. Combined, the volume impact from acquisitions and organic growth yielded an overall 22.8% increase in volume in Q4. Net sales in our fourth quarter did benefit from a 2.8% increase in pricing mix as we continue to reassess our portfolio SKUs and take price on those SKUs where we see higher costs. For the full year 2021, net sales were up 40.1% to $479.4 million from $342.2 million in 2020. This growth in our top line was led by organic growth of approximately 18%, coupled with M&A growth of approximately 22%. Gross profit during the fourth quarter increased to $18.7 million as compared to $16 million in the year-ago period. Reported gross profit margin decreased by 140 basis points to 16.9%, due primarily to $3.2 million of combined costs associated with our distribution center, relocations in California, and with acquisition-related expenses absorbed in the quarter. On an adjusted basis without these relocation and acquisition-related expenses, our adjusted gross profit margin increased 150 basis points to 19.8% versus 18.3% in the fourth quarter of 2020. The expansion of our adjusted gross profit margin is primarily related to the favorable sales mix shift towards proprietary and preferred branded products offset somewhat by an increase in freight and labor costs. Freight and labor costs rose somewhat notably in the quarter, and for this reason, we have taken further pricing and cost-saving actions in the first quarter of 2022. Selling general administrative expense increased to $27.7 million in the fourth quarter of 2021, compared to $21.4 million in the year-ago period. The increase in SG&A was primarily due to increased costs associated with our 2021 distribution center exit and relocation activities, and acquisition integration-related costs, as well as higher costs associated with supporting our public company status and long-term growth strategy. As noted in the press release, SG&A expense on an adjusted basis was $18.5 million, or 16.7% in net sales in the quarter, versus $11.2 million, or 12.8% last year, primarily driven by increases in added facility costs, marketing expenses, and salary and benefits. To be clear, the added facility cost in SG&A emanates from the significant year-over-year increase in the size and scope of the distribution centers that we now have under lease. Reported net loss attributable to common stockholders was negative 11 million or negative 25 cents per diluted share in the fourth quarter compared to a loss of 10 million or negative 43 cents per diluted share last year. Weighted average diluted shares outstanding were approximately $44.4 million for the fourth quarter of 2021. Similar to last quarter, 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 2020, which is the earliest comparison period. On this basis, pro forma adjusted net loss for the quarter was approximately negative $2.3 million or $0.05 per diluted share. per pro forma diluted share compared to an adjusted net income of 0.5 million or two cents per pro forma diluted share in the year ago period. Lastly, adjusted EBITDA was relatively flat at 4.9 million in the fourth quarter from 5 million in the prior year period. On a margin basis, adjusted EBITDA margin decreased 120 basis points to 4.5% from 5.7 in the prior year period, driven primarily by higher SG&A expenses related to net sales relative to net sales in the period comparisons. However, I would like to echo Bill's comments on the significant progress we've made across the full year of 2021, as our adjusted EBITDA more than doubled to 47.1 million from 21.1 million last year, and our adjusted EBITDA margin increased 360 basis points to 9.8% in 2021 from 6.2% last year. Moving on to our balance sheet, and overall liquidity position. As of December 31st, 2021, we had over 110 million in total liquidity between 26.6 million unrestricted cash and approximately 83.6 million available on our undrawn ABL revolving credit facility. We also maintained approximately 125.4 million in total debt outstanding. Based on our view of expected growth dynamics across the year, I'm happy to provide our 2022 outlook as well as some color around our current assumptions. We expect total company net sales growth of 20% to 28%, which translates to approximately 575 to 615 million in net sales for the 12-month period ended December 2022. We expect modest full-year organic growth and significant M&A growth of at least 20%. Note that our expectations of organic growth are weighted toward the back half of the year, with sequential improvement from a decline in organic sales in Q1 to positive organic growth beginning in Q3. Conversely, we expect M&A growth to be most significant in Q1 and Q2, and then tapering in Q3 and Q4. We expect that M&A and organic growth will lead to continued improvement in our sales mix, meaning an even higher percentage of proprietary brands sold for the full year of 2022. And we are modeling that the recent pricing actions and related transportation initiatives put in place will help mitigate the recent and expected increases in freight and labor costs. As you know, we will have SG&A expenses associated with the acquired companies for a full year in 2022, thereby raising our SG&A expense in dollar terms. However, we do expect that recent cost saving cost reduction initiatives and further integration actions planned in 2022 coupled with higher expected sales volumes will hold our adjusted SG&A as a percentage of net sales relatively flat with 2021 actual results. As a result of these plans, we expect adjusted EBITDA to range between 63 million to 74 million for the full year 2022, which represents approximately 11 to 12% of net sales. Our net sales and adjusted EBITDA estimates for the full year reflect our expectation that the first quarter of 2022 is likely to have an EBITDA margin profile similar to that experienced in the quarter just ended, as recent pricing actions and cost saving initiatives take hold in a more fulsome way in Q2 2022. We've laid out a few other 22 assumptions in today's earnings release. We encourage you to review them in conjunction with our full year guidance. In closing, we have made great strides this past year in transforming our business for sustained growth and improved profitability. Due in large part to the number of investments we made in the business in 2021, we believe we are well positioned to capitalize on the considerable growth and margin opportunities ahead in the controlled environment agriculture industry. This concludes our prepared remarks, and we are now happy to answer any questions you might have. Operator, please open the lines for questions.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Our first question comes from Andrew Carter with Steeple. Please proceed with your question.

Hey, thanks. I guess the first question is just kind of the certainty of the environment. I mean, I know that you basically said a kind of, first off, could you give us the magnitude of the organic sale decline expected in the first quarter, not returning to three-quarter, but just anything you can give us around the months, how things are tracking on a week-by-week, January, February, any incremental color there would be helpful. Thanks.

Hey, Andrew, how are you? Yeah, so I think John said in his numbers, but the number in Q4 organic was sort of mid-teens, call it 14, 15%. We're seeing similar results to that year-to-date in 22, so we don't expect it to miraculously turn here in March, although we hope spring will bring a brighter day, but we don't expect that to happen. So we're seeing that trend continue, and we're kind of modeling that, which is one of the reasons you see kind of that organic number showing up like it is in our 22 outlook, which is first half kind of looking like the second half of 21 and second half looking better as we start to lap the easier comps and hopefully get more growers back into the industry and back into the business.

Second question I wanted to ask, just in terms of kind of the margin, because I believe you outlined a margin profile of 14.5 to 15.5 when you were kind of looking at growth form of 2021 and It looks like it's in that range. So your initial guidance is about 300 basis points, kind of degradation. You have 400. I mean, when do you think you can get back to that mid-teens level? Is it pricing catching up? Is it just going to be a function of volume absorption given the estimates? Is it going to be like 23 we're getting back there? Just any clarity in getting back to that kind of margin profile that you got to on a pro forma basis last year. Thanks.

Yeah, I'll start, and John can certainly build on it. And, yeah, that's – certainly a challenge in the 22 outlook, right? I mean, we're taking a lot of costs as many industries and many contemporaries of ours are on freight, on inputs, on labor, on number of different warehousing, all the things that you know are out there. And so that really has eroded that margin. We have put in place the most aggressive pricing that we've taken on a broad basis, both reflecting through input cost increases, We've also started passing through freight impacts. We've raised our minimums. We've put on freight surcharges. Most of that's gonna start coming into effect in March and April. And so that's new for us. And the first time we're pushing that kind of cost return through. I think this will all shake out and normalize late this year, but I don't think we're gonna see that 13, 14% kind of numbers until 23. And that's frustrating because that was a good performance by the business. you know, kind of the first half of 2021 and these costs have frankly, you know, hit us hard and they hit us at a time when we were integrating, adding people, building SG&A, building capability, doing things you have to do as a public company, all that stuff. So it really hit us at a time, then the volume dropped in the back half and it really, you know, caused us to have to absorb an awful lot of costs and pass through as many as we could. And we're now getting more fully caught up on that as we're, you know, getting through this first quarter of 2022.

Thanks. I'll pass it on.

Thanks, Andrew.

Our next question is from Chris Carey with Wells Fargo. Please proceed with your question.

Hi, everyone. Hey, Chris. Hey, Chris. Hi. So I want to just better understand, you know, some of the confidence around backup recovery I hear you on the comps. It certainly sounds like year-to-date the markets are still under pressure, specifically on the West Coast. And so as you get into the back half of the year, can you maybe just dimensionalize how big of an impact you're expecting from new states coming online, East Coast or otherwise, to get to the back half acceleration? Also, you mentioned some pretty significant pricing coming in in March and April. How much are you pricing? I think it was 2.8 or 2.9% in this quarter. And so, you know, how is that going to be factoring into the back half? And then, you know, just perhaps on the M&A, you noted that the IGE had some pretty good backlog. And so, maybe can you just, you know, comment on upside from the M&A call and maybe that, you know, shielding some of the unknowns on organic sales growth. So thanks for kind of dimensionalizing the sales outlook specifically in the back half.

Yeah, I'll start and then John should give you some more on the pricing. But the four building blocks that we can see, and we don't have perfect visibility into the role of Virginia versus Louisiana versus Missouri, right? That's not where we, we're not able to do it at that level of precision, but Commercial momentum, and that comes in, you know, commitments that we have, backlog that we've got, you know, people that are moving business over to us, our DMI proposition, which is really the scheduled deliveries. We schedule those out months and months and months in advance. So we know that's all coming. It's essentially like a backlog, if you will. So we know that commercial business is still going to continue for us. And it's a newer business for us. So we're in a different point on the curve than others might be. So we can see you know, a good bit of the growth. And if you pulled apart our growth, you'd see that more of it is in the commercial side than in the retail side this year. Second is these peat bogs. Peat is a wonderful business, both as a standalone, as an ingredient in a professional mix, and also as an ingredient to go not only into cannabis and indoor and outdoor, but into other, you know, market segments of agriculture. And we've got 70% more acres this year. And while you're not going to get full you know, farming capability out of those acres in the first year, you're going to get some. And so PEAT gives us, again, sort of another visibility into some nice growth numbers. The new states, again, that we see that coming, we know those are there. We're getting, John quoted, a handful that we had over 100% growth in. That's not going to stop. Once that gets going, that keeps building. And that IGE backlog, that is a significant, you know, we expect to see 30%, 40%, 50% growth out of IGE in 22% versus 20%. their full year 21. And we know that because you can see it in the backlog. They have 50% deposits down for a lot of that. They have longer lead time sales cycles. They have three, four, five month lead times we have to give to these guys. So you can see that volume a little more clearly than you can kind of the retail volume that we've been sort of living on the last few years. So those are the four building blocks that give us the confidence and probably give us perhaps a little more optimism than you're hearing from other industry factors right now, because we see those things happening for hydro farm and others will obviously speak for themselves and that's fine. John, you want to cover and talk about the pricing dynamic? Sure.

Yeah. I'll touch on that. And Chris, just before I do, cause I know you asked about, I mean, as Bill talked about the IGE business that we recently acquired, you know, while we get a good early look from the backlog in that business, The other thing we're seeing is that in a lot of cases, you know, the new business we're winning with IGE tends to be in the eastern half of the U.S. So just another interesting element for us as we look to the back half of next year. On the pricing side, Bill's exactly right. I mean, we've taken more frequent pricing actions than we historically have. We've tended to take maybe one action per quarter historically over the last several quarters. And generally when we do that, we're not doing that on every skew. Of course, we're really only doing on the skews where we're seeing the additional pricing action as being necessary. But in our Q1 here, we actually took two separate actions inside of Q1. And we've got another action that we're looking at into Q2. The other thing I would tell you about pricing is historically when we've taken pricing, we've really kind of focused on the input cost side. and really put pricing in place to cover the incremental input costs we saw coming, really in the effort to maintain margin. With the recent increase in freight costs and labor costs that we've seen, we're taking a little bit broader view on pricing now. And in addition to product pricing, we're actually looking at some freight initiatives, include freight surcharges and raising freight minimums. all things that we think help in a material way. Historically for us over the past several quarters, pricing has been a low single digit kind of effect, obviously on a pretty good base, but a low single digit kind of effect. As we look across the full 2022 year, we're looking more towards a mid single digit, even a little bit better than mid single digit pricing for the full year effect. And again, that's an attempt to help mitigate these incremental costs we're seeing.

Thanks so much for all that. If I could squeeze in one, just because it's related, do you have any view on your product mix for this year? You know, how important will consumables versus durables be specifically if you're going, uh, East and, um, and, and clearly there'll be some, some durables business there, but obviously that's, that's recovering a little bit slower in your, in your base markets. So thanks so much.

No, they're IGE and, um, commercial new markets will be a little more durable oriented probably. Don't know that it'll move the total because the total is kind of a lot of momentum behind on a large scale and a lot of large numbers saying, but yeah, there will be a little more durables, you know, from those two growth drivers for a good bit of the year. Okay. Thank you. Thanks, Chris.

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

Hey, good afternoon, guys. This is Steven Langone for Bill Chapel. Just a quick question. How are you guys? Just a quick question on kind of what you guys are seeing in terms of the impact from SMG's recent acquisition of Lux Lighting on the California lighting business and that region thus far.

Yeah, you know, Lux has had a long history in California, as has Gavita and Hawthorne, so they have a deep penetration there. I think that is one of the weaker areas in the industry right now, kind of that West Coast lighting. A lot of that happened in Q4 of 2020 and Q1 of 21. So I think on a year-on-year basis, that area is probably not lapping as well. We don't have as much exposure in that market, meaning we don't have as much business in that market as they do. So it hasn't been a – big impact yet for sure we have a lot of respect for lux and a lot of respect for hawthorne and scott's but right now we're pretty pleased with our portfolio we have some ideas on how to compete more effectively in lighting and we think that's going to you know hopefully come through here pretty soon awesome thank you very much guys i appreciate it sure thanks

Our next question comes from Peter Grom with UBS. Please proceed with your question.

Hey, good afternoon, guys. I guess just around the organic sales outlook for modest growth, I mean, I guess can you maybe help define or quantify what you mean by that? You know, it seems to be flattish, I guess, based on the comment of M&A growth of at least 20%. So just, you know, could you maybe quantify that a bit? And I guess what I'm just really trying to understand is like what really changed versus, you know, early January. I know the category hasn't been great, but it doesn't really sound like, you know, Q1 is all that much worse versus, you know, Q4. So I just would love to kind of get your sense, you know, around what's really changed versus, you know, seven weeks back.

Yeah. Yeah. So just to clarify on, on modest, I think, you know, we're thinking low single digit, you know, growth as being modest. And I think Bill kind of said this earlier. I mean, look, we've gotten off to a start here in the first quarter that is in line with our guidance, but, you know, the industry is certainly not yet on a tear. We've seen some of our, you know, competitors and other players in the space, you know, struggle a bit with growth as well. So I think those things, you know, sort of err to the side of caution from our perspective. And I think, you know, Peter, you know well the industry can be very dynamic and move quickly. This past year is a great example. We do think, you know, we could see the flip opposite of that this year, but we're certainly not quite there yet, right? So for those reasons, we're remaining fairly cautious here.

Got it. I mean, I guess that kind of leads into my next question, which is kind of the confidence and the outlook as we stand today. So it sounds like, maybe I'm wrong, but it sounds like the cautious outlook is just simply being conservative, some conservatism given, you know, what we've seen of late. Is that fair? Or is it just, you know, more realistic or prudent based on where things stand today?

Yeah, I think it's realistic, prudent, and cautious, right, all together. And, you know, let's not forget, and everybody overlooks it, but 71% two-year stack, we're lapping some monsters here. And we really, that's not to be overlooked as we're coming off the COVID, you know, bump from a year, year and a half ago. So that's important in this. So we are being conservative and cautious because until it turns, it hasn't turned. And we don't want to get out ahead of ourselves. We don't want to put a number out there that we can't see our way towards. And so we decided to put out there sort of a range that we thought was very much down the middle of the fairway. We've got the momentum drivers I talked about with commercial impedance, new states, and IGE. But retail specialty is probably going to struggle a bit, and that's been a big part of our core. But luckily we have new things in offsetting, mitigating. The other thing, Peter, that I'm sure you're tracking like we all are is The headset data is starting to show some pricing moving up in some key states. That's a big deal, and that will bring people back into this category faster than anything. It's not a demand issue. It's simply a grower's willingness and interest to be in the category of various price points. So I think with the headset data showing modest tick-ups in pricing, that's going to be good for everybody. So those are the things we're watching, but we really haven't seen the turn yet that we would want to get more bullish on the core organic number.

Thanks so much. I'll pass it on.

Thanks, Peter.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from Andrea Teixeira with JP Morgan. Please proceed with your question.

Thank you. Good afternoon. So I wanted to just go back to the kind of the price commentary you just gave to Peter. Perhaps, you know, can you update also what are the inventory levels you've been seeing? So is that something you were concerned about? at your customer level that may instruct you to become still be conservative on this organic growth. And a question to John. I mean, you mentioned that there was an increase in SG&A. I mean, obviously because of the distribution centers you added, I think, like 70% more capacity. And also salaries, despite what you've taken down, 11%, I think, in your employee base so far because of the synergies. So can you try to bridge that gap, I believe the 300 to 400 basis points, that your ideal margin, if you are not suffering from your cost pressure. So if you can provide us with the cost pressure bridge, you could potentially lap, not in 2022, but perhaps in 2023. And then lastly, just the housekeeping. You mentioned a commercial tripled from last year, but how much are you embedding it to be this year, just as a fine point there? Thank you.

Yeah, I can start off, Bill, with the SG&A piece, and then maybe you can backfill with some of the other funds. But yeah, on SG&A, on a year-over-year basis in the quarter, it was up significantly, as we called out in the first release. When we think of SG&A, we tend to point to adjusted SG&A to take out some of the other factors that are not encapsulated in our adjusted EBITDA calc. So when we look at the adjusted SG&A, we're looking at roughly $18.5 million versus $11.2 last year. The biggest really sort of element of that bridge, which goes across these various buckets that we talked about in the earnings release, marketing, expenses, salaries, and benefits, is the fact that in the fourth quarter of this year, we owned five businesses that we didn't own in the fourth quarter last year, right? And so, you know, the acquisition companies do come with some SG&A, and when we fold those in, we're seeing, you know, some increase. On top of that, you know, our marketing spend in Q4 was definitely a little bit more than it was this time last year. We went to the MJBiz conference and actually spent for a bit of a coming out party at that conference this year. hadn't done it the year before. You know, we've got a full quarter of B&O insurance, which we didn't have last year, the facility costs, which we talked about, and really professional fees for us were a little bit more in this quarter on a year-over-year basis as we tried to knock out and did knock out sort of the full first year of SOX and other things that came with getting, you know, five acquisition codes embedded in our first 10K as an accelerated filer, which By the way, should be out and issued here later this evening. So those are the elements in the bridge. You know, we did, as Bill referenced in his prepared comments, we did do some reductions in force that will help them mitigate some of these cost challenges. But with the five, with the full year of five businesses that we didn't own before, You know, I don't think we're going to see our SG&A costs go down from a dollar perspective. But as we start to see our top line pick back up, I think we can, you know, recoup some of that compression that we felt here in Q4 and as we've kind of signaled that we're looking towards in Q1.

Yeah, I'll pick that up. On the couple of things you asked there, Andrea, on inventory, As we talk to our customers, most of the retailers will tell us that they're pretty backed up on lights. They've got a lot of inventory on lighting. And so that's an area where we're seeing retailers slow down a bit. I think the whole category, as I mentioned, based on the California remarks, has slowed down a good bit there. And you've seen that in other folks' results as well. But beyond that, I think it's just normalized less demand. I don't think it's really a backup in inventory. On the commercial side, yeah, we tripled the volume 20 to 21, and we've got strong double-digit growth, much more than 10%. I think it's a good bit more than 20% in there. It's not doubling or 80% up or anything like that. It's considered in the low 20s kind of percent growth on the commercial side for this year, plus we've got growth built into IGE, which is closely tied to commercial, but we don't look at it quite the same way. So those are the kind of numbers we're expecting in those segments of the business for 2022.

And that commercial would be how much in total for the total company? Commercial representing a smaller percentage, but just want to find out on that one.

In commercial and IGE, it's going to be in the kind of mid-20s percentage of a company.

Of the total. Okay. Sorry. I thought we were saying about growth. Okay. Perfect. Thank you.

And now I just gave you percentage sales versus the growth numbers. They happen to be very similar numbers, but different number, yeah.

Okay, wonderful. All right, thank you. I'll pass it on.

All right, bye.

Our next question is from Nicole DeBlaze with Deutsche Bank. Please proceed with your question.

Yeah, thanks. Good afternoon, guys.

Hi, Nicole.

Maybe we could just focus on pricing. One more question on that. how is the competitive pricing dynamic looking? Like, are you seeing your competitors take similar actions to what you're doing? And I guess how sticky is pricing in this industry? So if we do move into an environment where costs start to come down, will you then be, you know, in a position where you're going to be reducing price? Or do you think you can kind of keep the price that you've taken so far?

Yeah, we have had mostly kind of straight up inflation here for a couple of years. So we haven't gotten into that sort of how much do you have to give back issue yet? So we don't know yet. Pricing has been very sticky and the category has been very rational as people have passed on cost increases and dealt with supply chain delays. And so it's, it's, it's also an incredibly complicated business. We sell 6,000 SKUs. So to, to track pricing and percentage changes, all those skews all the time from 400 suppliers around the world at a, It definitely gets through and gets through pretty cleanly. And retailers are, you know, happy to take price. People are, you know, willing to cost up as they have to. We're trying to make sure we reflect through the things that are affecting our P&L. And we're not trying to expand gross margin. We're simply trying to expand or pass through the pricing that we're seeing, you know, affect us.

Okay, got it. Thanks. And just as a follow-up, It was helpful that you guys kind of provided quarterly cadence of organic growth that's built into the outlook. What about anything that we should know about the quarterly cadence of adjusted EBITDA margins? Is that also similar to organic growth starting off at the low point of the year and then improving sequentially from there?

Yeah, I can chime in on that one. Yeah, no, it's personal. For sure, you picked up on the call out that we expect Q1 margin to be something similar to what we've witnessed here in Q4 2021. So that should be our low point from a margin standpoint across the quarters in the year. The other thing I guess I would say is that typically we tend to see Q2 and Q3 somewhat seasonally have slightly higher margin profile than Qs 1 and 4. that has a little bit to do with sort of the top line and economies of scale, as well as mix of products during those periods. And I think we would expect that to hold true, too, here in 2022, based on what we're seeing now.

Thanks. I'll pass it on.

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back over to Mr. Tala for closing remarks.

Great. Thank you very much, Maria. We appreciate your interest in Hydrofront this afternoon, and thanks for joining us on the call. Everyone have a great day. Take care.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.