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?