Q3 2021 Hydrofarm Holdings Group Inc Earnings Call

November 11, 2021

Tactically acquire as we think it makes sense buildup the categories that need a little more support.

But we've got a really really solid portfolio at this point.

That makes sense. Thank you for the color.

Thanks, Sean.

Thank you as a reminder, ladies and gentlemen, if you would like to ask a question. Please press star one.

Next question comes from the line of Andrea Teixeira with Jpmorgan. Please proceed with your question.

Thank you good afternoon, everyone.

So bill and Sean what.

What gives you comfort on the guide for 8% to 10% organic growth in 2022 and of course, you alluded back.

Backend, assuming that this excess inventory and pricing and they are they're part of the gets resolved and how we should be thinking on that cadence.

Just a clarification on your commentary about margins to Peter Andrew like these.

Kind of commentary on the 14, 7% to 15.8 would be a pro forma but.

Should we be thinking of that realizing already in 2020 two or you are just saying is it would it be the underlying but we're still gonna have to face those those pressures as we go.

The short answer to your last question for me, ladies and John can certainly add is.

Yeah, we got still face the pressures, there's a lot of uncertainty out there right now in supply chain inflation price elasticity pricing labor all of the things that everybody every industry is dealing with so.

We don't just automatically say its a pro forma in 'twenty, one and therefore, it's a starting point for 'twenty two.

That's a strong number really strong number for 'twenty, one and we are going to have pressure on that we're going to work to get through it but overall it's a.

Kind of a place we want to work for what gives us confidence in the eight to 10 I think it is a couple of things you said Andre which is that.

We see the momentum over two or three years in the category and it's quite incredible 75% two year, 32% CAGR over the last two years, even with the weaker third quarter and so we say, it's going to keep the momentum going and so eight to 10 is a pretty.

Pretty solid safe number we think primarily growing in the back half rates slower in the first probably better in the second and then picking up nicely in the third and fourth the other pieces. We just got to believe that these four or five states that passed.

Over a year ago now we are going to start finally, implementing and become a much more meaningful part of our business and to date. They really have New York has spiked up a little bit even places like Louisiana, Missouri and started showing some nice growth on a percentage basis, but they're not really meaningful volume yet. So we think that an 8% to 10% call or call. It high single low double.

Kind of call.

As a P.

Pretty much down the middle of the fairway kind of number that we believe that just the natural.

The momentum of implementation the momentum in the category over the last several years gives us good comfort that we can actually execute that.

And I appreciate that when you are discussing the places in the state.

One of your competitors called out, Oklahoma, Illinois should that exposed to that state but.

Did you see a slow down.

There or not really.

No we don't.

<unk> has still done well for us we've seen it go faster than slower it hasn't really slowed down as much as I've heard from others, but it's hard to make a relative comparison right a lot of it might be kind of from where you started and a lot of it sort of depending on the category and maybe the guys who are heavier and equipments did better earlier and now the nutrient guys are doing.

A little bit better than we were a little heavier on the consumables side. So Oklahoma for US has had some fits and starts but its still a strong grower for us over the year and it's a top five state as you as I'm sure you know.

Thank you very much I'll pass it on.

Thank you Andrew.

Thank you. Our next question comes from the line of Bill Chappell with tourists Securities. Please proceed with your question.

Thanks, Good afternoon.

Hey, Bill.

Hey, a couple of questions one.

What are you and you've made I'm sorry, if you already does it what are you looking for.

Legislative or price wise or whatever I mean, first with California to see signs that things have stabilized.

Going forward does it maybe walking into my local dispensary and thing that my favorite product has gone up in price or is there something else and then for like New York, Virginia.

Connecticut, New Jersey is how what would should we be looking for in terms of.

Early sign that the sales are picking up is there something that legislative or it's tougher obviously to track.

Yeah. It is tough to track, mainly it's the politicians stopping fighting with each other and just deciding that they all need the tax revenue, let's not argue about what color the drapes or let's just get the house open and go right and.

That's been slow and they've had all kinds of rules that people were trying to put on a different things in different states and some of that's finally going by the board and it looks like Theyre going to get things moving because they've all been embarrassingly slow on that so there's not one piece of legislation or one sort of fell swoop. They can go out and.

Knock it all off we really is now state by state.

On the first part of your question. It really does come from pricing. It comes from the pricing, which you know a lot of that kind of hit this middle group right I believe that.

And John and I were talking about this earlier that <unk>.

Net net the commercial growers are still going to do a lot of their work and they're going to keep growing the.

The hobbyists and kind of the midrange ones are probably the ones that get hit the hardest in a downturn because they're like they've made a lot of money they've got a lot of cycles. When the price comes down a little bit they're not necessarily going to take the risk and go to the growing so it really is to make sure you wait for the pricing to return and we're hearing a little bit of.

Encouraging news on that but certainly not a big change that we would like to see to get it back to normalized levels.

Got it and then just.

Kind of a follow up on led lighting.

Where are we in kind of the conversion cycle I mean, I think was a lot of the industry growth in 2020 came from some of the same existing states that have already been recreational legal and so a lot of the growth came from just upgrades of led lighting at least from you and your major competitor and so.

Is there still a long way to go a big opportunity in the existing states or.

You, obviously just made a recent acquisition there just help out.

I understand that and kind of how you are positioned.

Yes, I think there was a surge last year and kind of the early converters that people in California, The one and remember, California is the only place that you're kind of required to get out of double ended or high pressure sodium a lot of other states are still very interested we still saw a good amount of of HP.

And the Devil ended lights on the under the Phantom brand. So it really is a California thing but.

As is true in this category a lot of California does drive a lot of the trends and I think that.

A year ago.

Our competitor is better positioned to get more of that we've now come out with our photo bio line and while it's doing doing well I think we missed the first big surge. So we got a little more ways to go and we hope to continue to build momentum on that photo biolife.

So I think that's where the category is has transformed I think there's a long way to go a lot more lights to be sold both OLED and non OLED because.

Category, just got so much room to build and to expand underneath and all these new states and across the existing ones as well.

Great. Thanks for the color.

Thanks Bill.

Thank you. Our next question is a follow up question from the line of Peter Grom. Please proceed with your question.

Hey, Thanks for taking the follow up I just wanted to.

Go back to the 8% to 10%.

Did you say.

Scenario, whereas the implementation doesn't occur for a lot of these new states does that put the 8% to 10% guidance at risk.

Yes.

It is first of all is in that guidance just an outlook on our preliminary wanted that right.

Yes, I think that you know given the history in the business I mean last year, we did 40% all organic in.

Basically no new states right. So this category has a natural history are you done.

16 years at 19% compounded eight to 10 should be kind of an okay year, we're not really stretching for the guns here were all little.

Hesitant to get ahead of our skis because of what we're seeing right now. So I think eight to 10 is a should be a very conservative number but until it turns it looks hard right you're not there yet.

So I don't I wouldn't call it labor.

At risk or anything I think it's just a it's just a little bit of an early view that we think is a is certainly achievable.

Okay. Thank you.

Yes, no problem. Thanks Peter.

Thank you we have no further questions at this time I would like to turn the floor back over to bill for closing comments.

Great. Thanks, so much sure Devin and we appreciate your interest today and questions and look forward to speaking with you during the follow ups take care. Thank you guys.

This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.

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Good day, ladies and gentlemen, and thank you for standing by welcome to the Hydro Farm 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 opened for your questions. Following the presentation. Please note that this conference is being recorded today November 11th 2001 2002.

I would now like to turn the call over to Mr. Fitzhugh tailor managing director at ICR to begin.

Thank you Devin and good afternoon, everyone.

With me on the call today is bill Toler Hydro farms, Chairman and Chief Executive Officer, and John London, The Companys Chief Financial Officer.

By now everyone should have access to our third quarter 2021 earnings release and form 8-K issued today after market close.

These documents are available on the investors section of the hydro farms website at Www Dot Dot Hydro farm Dot 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 more detailed discussion of the risks that could 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.

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 Taylor Bill.

Thank you <unk> and good afternoon, everyone. During the third quarter, we grew our top line by over 28% and improves 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.

<unk> is our proprietary brands on the larger part of our total sales has 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 in 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%.

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% or an approximate 32% two year compound 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.

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 growing 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 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 a year ago that number was less than 10% and again, that's on a pro forma basis for the five deals we did with.

We've added several preferred brands, most notably advanced nutrients in Canada, and Texas, Florida, and 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 has positioned our company well to capitalize on the opportunities ahead.

As you know about 40% of the U S 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.

<unk>, new adult use legislation with several of these states have been slower to implement their adult use plans and we expect to see our volumes build significantly there many of those areas over.

Some period of time.

While we're not yet prepared to offer detailed guidance on fiscal 'twenty to 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 the organic growth will likely be weighted toward the back half of 'twenty two as our industry labs 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 and.

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 a lot benefit from M&A to take us well above our IPO algorithm of 20% plus.

And 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 GE and their commercial equipment product range. We're excited.

With a 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 than two weeks ago. We successfully completed our acquisition of <unk>, our innovative growers equipment, an Illinois based manufacturer of horticulture benches, racking and led lighting systems.

He also has commercial equipment product range that will complement hydro farm's existing lineup of high performance proprietary branded products in total we did five acquisitions during 2021, which would not only provided us with recurring revenue at accretive margins, but have also added valuable manufacturing and distribution capabilities to <unk>.

Business.

As we work deeper into the fourth quarter, we will reorient, our focus to digest and further integrate these recent acquisitions and additional will be also putting plans in place to improve productivity further reduced costs, which we expect will need to help offset the ongoing inflationary pressures.

Lastly, our recent financing has given us strong liquidity heading into 2022 and will continue to use our dry powder to remain opportunistic with our acquisition strategy.

In closing we believe the current oversupply situation as 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 built through the five acquisitions this year as well as improved distribution footprint, we have positioned our company to successfully.

<unk> on the continued growth in the <unk> 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.

Thanks, Bill and good afternoon, everyone.

Net sales for the third quarter increased 28% to $123 8 million from $96 7 million in the prior year period.

The increase in net sales was largely related to the year over year impact from the four companies that we acquired between May and August.

Together these companies had a 32% to our topline in the third quarter of 2021 relative to the prior year period, and they offset a decline in organic growth, which was impacted by the short term softness we experienced predominantly in California in Canada, which bill explained earlier.

Excluding California U S sales volume was up 5% year over year in Q3 as other markets such as Michigan, Oklahoma mean successfully lapped strong comparable sales last year, while several other states that somewhat recently passed adult use legislation has not yet gained full momentum.

Combined the volume impact from acquisitions and organic growth, yielding an overall, 24% increase in volume in Q3.

Net sales in our third quarter did benefit from a two 8% increase in pricing mix as we continue to reassess our portfolio of Skus and take price on those skus, where we see higher input costs. This is something we expect will continue as we look out across the next several quarters.

Year to date net sales are up 45% to $369 million from $254 8 million during the same period in 2020.

Year to date growth on our top line was led by organic growth of approximately 29% coupled with M&A growth of approximately 16%.

Gross profit during the third quarter increased by 65% to $30 million as compared to the year ago period, while gross profit margin improved by 540 basis points to 24, 2%.

The expansion of our gross profit margin was primarily related to the favorable sales mix shift towards proprietary and preferred branded products.

Briatore brands, we acquired share accelerating our mix shift and as a result, our gross profit margin has increased considerably.

During the quarter, we also absorbed approximately $1 7 million in acquisition related costs within our cost of goods sold which negatively impacted reported gross profit margin.

So on an adjusted basis or 24, 2% reported gross profit margin would adjust the 25, 6%.

Selling general and administrative expense increased to $32 1 million in the third quarter of 2021 compared to $12 5 million in the year ago period.

The increase in SG&A was primarily due to increased costs associated with our accelerated M&A strategy, which directly accounted for over 70% of the total increase while higher costs associated with supporting a public company, our public company status and long term growth strategy made up the difference.

As noted in the press release SG&A expenses on an adjusted basis were $16 9 million or 13, 6% of net sales in the quarter versus $11 million or 11, 3% last year.

While many of our SG&A expenses are necessary investments in the sense that they are required given our public company status or accelerated M&A strategy, we will continue to drive efficiency where possible.

Reported net income attributed to common shareholders stockholders was $17 3 million or <unk> 37 per diluted share in the third quarter compared to a net income of $2 million <unk> per diluted share last year.

Note that we had a discrete tax benefit in the quarter, which had a negative impact on our reported net income.

The tax benefit resulted from recent acquisition, which can enable the release of a portion of the valuation allowance against our deferred tax assets.

There is further detail at this point in our 10-Q, which will be filed shortly.

Weighted average diluted shares outstanding was approximately $46 3 million for the third quarter of 2021.

Similar to last year, 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 income for the quarter was approximately $7 7 million or 17 cents per pro forma diluted share compared to a profit of $4 3 million or <unk> 13 per pro forma diluted shares in the year ago period.

Lastly, adjusted EBITDA more than doubled to $16 1 million or 13% of net sales for the third quarter of 2021 from seven 4 million or seven 7% of net sales in the prior year period.

I should also note that on a year to date basis, our adjusted EBITDA and.

More than double the $42 2 million from $16 1 million last year.

Both of these adjusted EBITDA comparisons for the quarter and for the year to date period represent dramatic increases. Although we are far from done we're very proud of our collective team for all the hard work that has been required to get to this point.

Moving onto our balance sheet and overall liquidity position as of September 32021, we had $14 5 million in cash cash equivalents and restricted cash and approximately $27 7 million and total debt outstanding.

Subsequent to the end of the third quarter as we previously announced we entered into a new $125 million senior secured term loan facility.

We used a portion of the net proceeds from the new term loan to fund the cash portion of the GE acquisition and to repay the outstanding balance on our existing revolving credit facility.

Sequent to these transactions, we have substantial cash on hand, and up to $100 million of available borrowing capacity under our existing revolving credit agreement.

We've also leaned into inventory, which was up considerably in the third quarter.

With the new term loan and strong inventory positions, our modest leverage provides us the flexibility needed in the near term to enable continued growth while also allowing us to remain opportunistic on future M&A opportunities.

Lastly, we are reaffirming.

Reaffirming our recently updated 2021 outlook.

We expect total company net sales growth of 37% to 43%, which translates to approximately $470 million to $490 million net sales for the 12 month period ending December 2021.

We expect organic growth of approximately 18% to 23% heavily weighted towards the first half of the year and M&A growth of 19 to 20 heavily weighted towards the second half of the fiscal year.

As Bill previously noted the midpoint of our sales outlook implies a two year organic growth rate of over 75% and an approximate 32% two year compound annual growth rate organic growth rate.

These numbers reminds us that while we may be lapping strong comps from the back half of 2020, our IPO growth algorithm, which called for mid teens organic growth still very much intact.

Our outlook also calls for adjusted EBITDA of $47 million to $53 million for the full year 2021, which represents approximately 10% to 11% of net sales.

The midpoint of these full year estimates imply a higher year over year adjusted EBITDA margin for the fourth quarter, albeit seasonally lower adjusted EBITDA margin for the fourth quarter relative to the third quarter.

Please note that this outlook only captures partial year contributions of the five acquisitions completed between May and early November and because of this we also would like to highlight our estimate on a pro forma full year basis as if all five acquisitions had occurred on January one 2021.

And on that basis, the company would have expected to generate between.

$580 million to $600 million of net sales and 85% to $95 million of adjusted EBITDA.

We believe our strong growth this year underscores the many benefits of our business model, which will continue to be fueled in large part by the considerable growth that we expect to still yet to come in the <unk> industry.

This concludes our prepared remarks, and we're now happy to answer any questions you might have operator. Please open the line for questions.

Thank you we will now be conducting a question and answer session.

I'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is another question. Kim you May press star two if he would like to remove your question from the queue.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star one moment. Please while we poll for questions.

Our first question comes from the line of Andrew Carter with Stifel. Please proceed with your question.

Hey, Thanks, good morning.

I appreciate that you reaffirmed the kind of the update and we're really just I guess to two maybe three weeks away from the last one, but it's a pretty wide range in the fourth quarter. So I just wonder if you wanted to know if you could talk about that what you've seen.

Kind of what puts you what puts you at the low what puts you at the high end of the range for the fourth quarter.

Yes, I mean, the volume has continued to be in Q4 pretty much what we saw in Q3 right. So there's sort of.

Two to three quarter.

Transitory issue that we've talked about many others have talked about it sort of stayed at that kind of a level. So we're not going to call anything more than what we're seeing and so where they are trending at a similar level to what we saw in Q3 and we have of course, the kind of the seasonal downtick that we get in Q4 anyway, putting those two things together.

This hopefully conservative here, but we think that the range is still still very valid John you want to add to that or you think it covers.

No I think that covers it well.

Got it second question on the kind of pro forma portfolio, you've outlined it's $14 seven to 15, 8% EBITDA margin.

Should that be kind of what we're looking at for FY 'twenty to anything that would put outsize risk I know, it's probably going to be a difficult first half of the year for you guys. I know you've got input cost inflation, but long inventory positions, but anything that would push you may be outside that range may be lower just any I know it's early for 'twenty, two but just anything you have there.

It is early but we've obviously, we started looking at it and yes, I mean, the inflation the labor cost the transportation underneath all of that.

We've been able to take some pricing, which is fine and we will continue to do that but eventually pricing is going to have elasticity as you don't want to put more pressure on volume. So yeah. I think it's fair to say that number is going to have pressure on it in 'twenty, two and we're going to work really hard to hold that number perhaps do better but right now as we look at it we say yeah. That's a that is there.

No formal number for 'twenty, one given all the things that are going on in the world in the supply chain and labor and all the things we're all dealing with.

There could be some pressure on that but we're going to we're going to work hard to try and maintain or improve it.

Thanks, I'll pass it on.

Thanks, Andrew.

Thank you. Our next question comes from the line of Peter Grom with UBS. Please proceed with your question.

Yeah, Hey, good afternoon guys.

Hey, David just maybe following up on the margins it looked through all the acquisitions your business mix has changed quite substantially.

Greater percentage of our own brands and nutrients and growing media.

And when I think about the implied step down in EBITDA margin.

And in your guidance for Q4 is that just simply the seasonality.

Now I know Q4 is always been a bit lower but it is a pretty meaningful step down sequentially versus Q3. So so what's driving that and then I kind of wanted to.

So after the pro forma EBITDA.

For next year in a different fashion and kind of following up on Andrew's question, but like.

You kind of talked about 8% to 10% organic top line growth, but you've kind of alluded to cost pressures I know youre, hoping to offset some of those price increases, but would it be fair to assume that.

On those.

Cost pressures you are seeing that you would expect EBITDA growth off of that pro forma number to be below that 8% to 10% organic.

Yes, I'll address the first question around the Q4.

Seasonally adjusted the margin and yes, no I think I think that's right I mean, I think the seasonality Peter in conjunction with the SG&A levels that were carrying today is really what gets us there.

As you know the the leverage point there.

It comes with sort of the dip in seasonal sales that we typically experience would have some impact we do expect SG&A on an adjusted basis to be a little bit higher in Q4 than it was in Q3 really because we're picking up SG&A from the <unk> acquisition, and we will have a full quarter of some <unk>.

Additional costs, we had in Q3 from folks that we added to the to the corporate team.

Yes, and Peter to your second part of that question I would just say that too early to say on the EBITDA growth for next year, we're not ready to get that far into it into any kind of an outlook.

We certainly want to see expansion, but the.

The 8% to 10% organic number we're going to get a nice benefit on the M&A side. So our total growth number it'll be quite a bit above that but we just haven't gotten all the way there to be able to kind of say, what that's going to be at or above or below.

Got it.

That's helpful I'll pass it on.

Thanks Peter.

Thank you as a reminder, ladies and gentlemen, if you would like to ask a question. Please press star one. Our next question comes from the line of Jan John Anderson with William Blair. Please proceed with your question.

Good afternoon, Hi, Bill Hi, Jonathan.

John.

A couple of questions for you one I was curious if.

With the slowdown that you're seeing obviously.

California, Canada, primarily.

And it's affecting the entire industry or are you seeing any.

<unk> dynamics changing at all with respect to kind of pricing or promotion.

Anyone trying to lean in and.

Take market share just just trying to get a sense for.

Whether the competitive backdrop. This maybe tenor has changed a little bit during this period or whether it's similar.

Similar okay.

Yeah.

No. We I would say there was a little bit of that at the end of Q2, and we certainly saw some activity that was pretty aggressive.

We've seen individual activity on the lighting side, where there's a lot of good competitors. There there's sort of four or five brands that are in people's consideration set and theres been some aggressive there, but I think the major major competitive factors, both retailers and suppliers and manufacturers.

So it remained pretty rational and just realize that we are in an agricultural category that has these blips.

Blips every few years, and we certainly need to be smart and write it out we certainly plan to do that and we're working to find profitable volume in constructive ways to work with our customers, but I haven't seen anybody sort of go to the mat if you will.

Perhaps people did back in 2018, but this is so different in 2018, I don't think you're going to see any of those behaviors from anybody.

Yeah that makes sense, Okay, and then the second one kind of a two parter I guess.

Yeah.

If you look at the portfolio today with all of the changes that you've made through your own internal development as well as the type acquisitions as you've noted.

<unk>.

Where are you today in terms of the status of some of the categories and in your own brand or proprietary brand mix.

Trying to get a sense, where you are.

How do you feel you are in terms of being well represented through.

Proprietary.

Preferred in the various categories and then the second part.

Been so acquisitive at some point do you pivot to integration over additional acquisition.

Just in order to kind of make sure that you know.

The brands that you've acquired and the operations that you've acquired or or or.

Great It in a way that.

You have cut type platform. If you will so I'll leave it at that thanks, a lot there are no no no.

Thanks, John Good question on the proprietary mix I'll kind of go through the big categories. If you will I would say that lighting is still our highest percentage of our total sales.

And our proprietary brand I think it's some number like over 90% primarily its phantom photo bio so not necessarily our strongest category and we are catching up after being a late entry on the Leds, but its certainly a category where on a pure percentage of total and proud Jerry it's the highest development with the acquisition of the nutrient companies four of the companies.

Have a nutrient component to them now nutrients is a really nice representation of proprietary brands, although we still represent a ton of.

Non proprietary brands that we enjoy selling as well so let's say well developed category equipment supplies are sort of in that.

40% range of.

Our sales are in our own brands and then really grow media is the probably the lowest even though we acquired.

<unk> innovations, which has wonderful growth media brands its still the lowest as a percent of total for us. So that's how those categories now now spread out so to your point to your second question, Yes, we fully believe that while M&A will be an important part of what we do.

Next year. The most important thing is that we take a when we purchased run it well drive growth in those businesses look for productivity and synergies and scale and opportunity and all the things you would do as a natural manufacturer and natural.

Good company to find those kind of things. So yes, I think it'll be more of a year of integration optimization driving innovation within your own core brands because honestly 2021 was all about getting the portfolio right. So that we can compete effectively against.

The competitive set out there so we could be the guy that provides a solution for our commercial customers working through our retailers and working to of course, the obvious survive from those retailers all that plays together and we're pretty pleased with the amount of progress. We made in 2021. So we do want to have a little bit more focus on integration.

Tactically acquire as we think it makes sense buildup be categories that need a little more support.

But we've got a really really solid portfolio at this point.

That makes sense. Thank you for the color.

Thanks, Sean.

Thank you as a reminder, ladies and gentlemen, if you would like to ask a question. Please press star one.

Next question comes from the line of.

Andrea Teixeira with Jpmorgan. Please proceed with your question.

Thank you good afternoon, everyone.

So bill and Sean what.

What gives you comfort on the guide for 8% to 10% organic growth in 2022 and of course, you alluded a backend assuming that there's excess inventory and pricing and they are they're part of the <unk> gets resolved and how we should be thinking on that cadence and just the second.

Execution on your commentary about margins to Peter and Andrew like these.

Kind of commentary on the 14.7 to 15.8 would be a pro forma but should we be thinking of that realizing already in 2020 two or you are just saying is it would it be the underline, but we still going to have to face those those pressures as we go.

The short answer to your last question for me at least and John can certainly add is.

We don't just automatically say its a pro forma in 'twenty, one and therefore, it's a starting point for 'twenty two.

That's a strong number really strong number for 'twenty, one and we are going to have pressure on that we're going to work to get through it but overall it's a.

Kind of a place we want to work for what gives us confidence in the eight to 10 I think it is a couple of things you said, Andrea which is that.

Pretty solid safe number we think primarily growth in the back half rates slower in the first probably better in the second and then picking up nicely in the third and fourth the other pieces. We just got to believe that these four or five states that passed.

Over a year ago now, we're gonna start finally, implementing and become a much more meaningful part of our business and to date. They really have you know New York has spiked up a little bit even places like Louisiana, Missouri and started showing some nice growth on a percentage basis, but they're not really meaningful volume yet. So we think that an 8% to 10% call or call. It high single low double.

Kind of call.

As a P.

Pretty much down the middle of the fairway kind of number that we believe that just the natural.

The momentum of implementation the momentum in the category over the last several years gives us good comfort that we can actually execute that.

And I appreciate that when you're discussing the places in the state.

One of your competitors called out, Oklahoma, Illinois should that exposed to that state but.

Did you see a slow down.

There or not really.

Yeah. It's you know we we don't this.

Oklahoma has still done well for us we've seen it go.

Faster than slower it hasn't really slowed down as much as I've heard from others, but it's hard to make a relative comparison right a lot of it might be.

From where you started and a lot of it sort of depending on the category and maybe the guys who are heavier and equipments did better earlier and now the nutrient guys are doing a little bit better than we were a little heavier on the consumables side. So Oklahoma for US has had some fits and starts but its still a strong grower for us over the year and it's a top five state as you as I'm sure you know.

Thank you very much I'll pass it on.

Thank you Andrew.

Thank you. Our next question comes from the line of Bill Chappell with tourists Securities. Please proceed with your question.

Thanks, Good afternoon.

Bill.

Hey, just a couple of questions one.

What are you and you've made I'm sorry, if you already said.

What are you looking for a.

Legislative or price wise or whatever I mean, first with California to see signs that things have stabilized and then going forward does it maybe walking into my local dispensary and thing that my favorite product has gone up in price or is there something else and then for like New York, Virginia.

Connecticut, New Jersey is you know how what what would should we be looking for in terms of.

Early sign that the sales are picking up is there something legislative or it's tougher obviously the track.

Yeah. It is tough to track, but mainly it's the politicians stopping fighting with each other and just deciding that they all need the tax revenue, let's not argue about what color the drapes or let's just get the house open and go right and.

Date.

On the first part of your question. It really does come from pricing right. It comes from you know the pricing, which you know a lot of that kind of hit this middle group right I believe that.

And John and I were talking about this earlier that <unk>.

Net net the commercial growers are still going to do a lot of their work and they're going to keep growing the.

Encouraging news on that but certainly not a big change that we would like to see to get it back to normalized levels.

Got it and then just.

Kind of a follow up on led lighting, Oh, where are we in kind of a conversion cycle. I mean, I think was a lot of the industry growth in 2020 came from some of the same existing states that have already been recreation legal and so a lot of the growth came from just upgrade to led lighting.

From you and your major competitor and so is there still a long way to go a big opportunity in the existing states or you. Obviously just made a recent acquisition. There just help me understand that and kind of how you are positioned.

The Phantom brand. So it really is a California thing but.

As is true in this category like California does drive a lot of the trends and I think that.

A year ago, our competitor was better positioned to get more of that we've now come out with our photo bio line and while it's doing doing well.

We missed the first big surge so we got a little more ways to go and we hope to continue to build momentum on that photo dialogue.

So I think that's where the category is that has transformed and I think there's a long way to go a lot more likely to be sold both OLED and non OLED because category just got so much room to build and to expand underneath and all these new states and across the existing ones as well.

Great. Thanks for the color.

Thanks Bill.

Thank you. Our next question is a follow up question from the line of Peter Grom. Please proceed with your question.

Hey, Thanks for taking the follow up I just wanted to go.

I'll go back to the 8% to 10% I mean.

Let's just say.

A scenario, where the implementation doesn't occur.

Lot of these new states does that put the 8% to 10% guidance at risk.

Hum.

First of all is in that guidance, just an outlook on our preliminary wanted that right.

Yes, I think that you know given the history in the business I mean last year, we did 40% all organic in.

There's basically no new states right. So this category has a natural history are you done.

16 years at 19% compounded eight to 10 should be kind of an okay year, we're not really stretching for the guns here, we're all a little.

Hesitant to get ahead of our skis because of what we're seeing right now. So I think eight to 10 is a should be a very conservative number but until it turns it looks hard right you're not there yet.

So I don't I wouldn't call it labor.

At risk or anything I think it's just a it's just a little bit of an early view that we think is a is certainly achievable.

Okay. Thank you.

Yes, no problem. Thanks Peter.

Thank you we have no further questions at this time I'd like to turn the floor back over to Bill for closing comments.

Great. Thanks, so much sure Devin and we appreciate your interest today and questions and look forward to speaking with you during the follow ups take care. Thank you guys.

This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.

Q3 2021 Hydrofarm Holdings Group Inc Earnings Call

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