Q4 2021 Hydrofarm Holdings Group Inc Earnings Call
Good day, ladies and gentlemen, and thank you for standing by welcome to the Hydro arm 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 opened for your questions. Following the presentation. Please note that this conference is being recorded today March 1st 2022.
I would now like to call turn the call over to Mr. Hu tell our managing director at ICR to begin.
Thank you Maria and good afternoon, everyone.
With me on the call today is bill Toler Hydro farms, Chairman and Chief Executive Officer, and John London, and the company's Chief Financial Officer.
By now everyone should have access to our fourth quarter 2021 earnings release and form 8-K issued today after market close.
These documents are available on the investors section of hydro farms website at Www Dot Hydro farm dotcom.
Before we begin our formal 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.
Payments 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 records reconciliations to comparable GAAP measures are available in our earnings release.
With that I'd like to turn the call over to Bill Toler Bill.
Thank you. Thank you 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 fighter farms is 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 2021 we posted total growth of over 40% in 2021 be a 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 are 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 .
Help to reshape our product portfolio as a result of these acquisitions on a pro forma full year basis at 77% of our sales come from proprietary and preferred brands compared to just 66% last year.
In addition on a pro forma basis, the consumable 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 before we relocated and expanded several of our distribution centers, which on a combined basis with our recent acquisitions and the effect.
Increasing our distribution and manufacturing footprint by over 500000 square feet, representing an increase approximately 70%.
And finally, we also took numerous actions across the year to strengthen the hydro farm platform in G by successfully adding important leadership roles organizing our ESG effort and publishing hydro farms first sustainability report and by bringing our tunnel controls environments in the full Sox compliance in.
Our first year as a public company again.
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 of these accomplishments better positioned us to capitalize on the continued long term expansion of controlled environment agriculture in the U S and Canada 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 I G acquisition. The one we completed last back in November of 'twenty 'twenty. One currently I G 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 in store.
<unk>, a 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 continue to successfully both 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're 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 as many new opportunities going forward.
Another exciting driver in our business or our pic products peat Moss.
A segment of Aurora innovations, which we acquired last June experienced record sales in 2021 and re released at least secured additional bogging 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 category.
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 op.
<unk> 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 the state legislative changes and increasing popular support.
Finally in late 'twenty one in early 'twenty. Two 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 savings side I'll note by the end of the first quarter of 2022, we will have reduced our employee base by about 11 per.
<unk> 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 cost to help mitigate the impact of inflationary pressures and.
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 shovels 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 to have plenty of reasons to be positive in 2022, particularly as they 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 is related to the year over year impact from the five companies that we acquire 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. So most prominently in California and in Canada, but.
We experienced organic growth softness in Q4 in several markets. We did see several other states did more recently passed adult use legislation build some momentum.
In particular, we experienced more than a 100% growth rates in the quarter in New York, Missouri, Louisiana, Arizona, and Virginia, as well as strong growth in several less mature candidate states combined the volume impact from acquisitions and organic growth.
Overall 22, 8% increase in volume in Q4.
Net sales in our fourth quarter did benefit from a two 8% increase in pricing mix as we continue to reassess our portfolio skews and take price on those skus, where we see higher costs.
For the full year 2021, net sales were up 41% 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 cost 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 three 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've 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.
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% of 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 salaries 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 <unk> 25 per diluted share in the fourth quarter compared to a loss of 10 million or negative <unk> 43 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 five cents per diluted.
Poor per pro forma diluted share compared to an adjusted net income of <unk> 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 four 5% from $5 seven 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 2021 is 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 nine 8% in 2021 from six 2% last year.
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Moving onto our balance sheet.
And overall liquidity position as of December 31, 2021, we had over $110 million of total liquidity between $26 6 million of unrestricted cash and approximately $83 6 million available on our Undrawn ABL revolving credit facility.
We also maintain approximately $125 4 million of 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 million to $615 million 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.
Virtually 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.
When we are modeling at the recent price action 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.
And as a result of these plans, we expect adjusted EBITDA to range between 63 million to $74 million for the full year 2022.
This 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 2020.
Two.
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 and transforming our business for sustained growth and improved profitability.
Due in large parts of 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 a controlled environment agriculture industry.
This concludes our prepared prepared remarks, and we're now happy to answer any questions you might have operator, please open the lines for questions.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. 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 starkey.
One moment, please while we poll for questions.
Our first question comes from Andrew Carter with Stifel. Please proceed with your question.
Hey, Thanks, I guess my first question is just kind of a certainty certainty of the environment I mean, I know that you've basically said a kind of first off could you give us the magnitude of the organic sales 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 and any incremental color there would be helpful. Thanks, Yeah, Hey, Pat.
Hey, Andrew how are you.
Yesterday, I think John said in his numbers, but the number in Q4 organic was sort of a mid teens call. It 14, 15%, we're seeing similar results to that year to date in 'twenty. Two so we don't expect it to miraculously turn here in March although we hope spring will bring them bring a brighter day, but we don't expect that to have.
And 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 'twenty two outlook, which is first half kind of looking like the second half of 'twenty, one and second half looking better as we start to lap the easier comps and hopefully get more borrowers back into the industry and back into the business.
Second question I wanted to ask just in terms of kind.
Kind of the margin because I believe you outlined the margin profile of 14, and a half to 15 and a half when you were kind of looking at pro forma 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 think when do you think you can get back to that mid teens level is it pricing catching up is it just going to.
A function of volume absorption given the estimates there'll be like 23, we're getting back there just any clarity and getting back to that kind of margin profile that you got to be 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 a challenge in the 'twenty two outlook right I mean, we're taking a lot of cost as many industries and many you know contemporaries have hours are on on freight and input some labor in a number of different warehousing all of the things that you know.
No we are out there and so that really has eroded that margin. We have put in place are 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 change that we put on for freight surcharges. Most of that is going to start coming into effect.
In March and April and so that's new for us in the first time, we're pushing that kind of cost returned through I think this will all shake out or normalize late this year, but I don't think we're going to see that 13, 14% kind of numbers until 'twenty three.
And that's frustrating because that was a good good performance by the business you know kind of the first half of 2021 and these cost and frankly you know.
It is hard and it 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 drop in the back half and it really are 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 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.
Okay.
Hi, everyone.
Hey, Chris.
Hi, Chris.
Hi.
So I I want to.
Better understand.
Some of the confidence around back half recovery.
I hear you on on the comps.
Certainly it 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.
How much are you pricing I think it was two eight or two 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 on the M&A.
Notice that the IGT he had some pretty good backlog and so maybe can you just.
Comment on upside from the M&A call them, maybe that shielding some of the unknowns.
Unknowns on organic sales growth, so things were kind of dimensionalize it.
The sales outlook, specifically in the back half.
Yeah, I'll 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 verses, Missouri, right, that's not where we were not able to do it at that level of precision, but commercial momentum and that comes in.
Commitments that we have backlog that we've got you know people that are moving business over to us are D. M. I, a 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 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've if you've pulled a part of our growth you'd see that more of it is in the commercial side and in the retail side. This year second is these peat bogs Pete is a wonderful business both as a standalone as an ingredient in a professional mix and also as a.
Ingredients to go not only into cannabis and indoor and outdoor but into other 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 that first year, you're going to get some and so Pete gives us again sort of another visibility into some nice growth number.
The new states again that we see that coming we know those are there we're getting junk ordered a handful that we had over 100% growth in that's not going to stop once that gets going that keeps building and then I G backlog that is a significant you know we expect to see 30 40, 50% growth out of I G and 22 versus their full year.
21, a 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 times sales cycles. They have three or four five months you know lead times, we have to give to these guys. So you can see that volume a little more clearly than you can Canada retail volume that we've been sort of living on the <unk>.
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 are hearing from other industry factors right now because we see those things happening for hydro form and others will obviously speak for themselves and that's fun, John you want to cover and talk about the pricing dynamic.
Sure Yeah, I'll touch on that and Chris just before I do because I know you asked about I mean, as bill talked about the I G.
E business that we recently acquired.
Well, 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.
The new business, we're winning with I G E tends to be in the eastern half of the U S. So just another interesting element of course, as we look to the back half of next year.
On the pricing side Bill is exactly right I mean, we've we've taken more frequent pricing actions than we historically have we we tend 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 SKU of course, we're really the only doing on the Skus, 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.
We've got another action that we're looking at into Q2. The other thing I would tell you about pricing has 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 cost we saw coming really didn't do that for 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 then and in addition to.
Pricing, we're actually looking at some great initiatives.
<unk>, you know freight surcharges and raising free 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 up 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 to even a little bit better than mid single digit pricing for the full year.
And again, that's in 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 world consumables versus durables be specifically, if you're going east and and clearly there'll be some some durables that's up there, but obviously, that's that's recovering a little bit slower in here and your base markets. Thanks, So much.
Now bear I G E.
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 it in large scale now the law of large numbers, saying, but yeah, there will be a little more durables.
From those two growth drivers for for for a good bit of the year.
Okay. Thank you.
Thanks, Chris.
Our next question comes from Bill Chappell with Suntrust. Please proceed with your question.
Hey, Good afternoon, guys. This is Stephen Lang on for Bill Chappell.
Thanks for your question.
How are you guys.
Just a quick question on kind of what you guys are seeing in terms of the impact.
From SMT its recent acquisition of locks lighting on the California lighting business in that region, thus far.
Yeah.
Luxe has had a long history in California as has davita in 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, 'twenty, one 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 into Scotts, 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 hopefully come through here pretty soon.
Awesome. Thank you very much guys I appreciate it.
Sure.
Yeah.
Our next question comes from Peter Grom with UBS. Please proceed with your question.
Hey, good afternoon guys.
It's just around the organic sales outlook for modest growth I mean.
I guess can you maybe help us define or quantify what you mean by that it seems to be flattish I guess based on the comment that if M&A growth of at least 20%. So just could you maybe quantify that a bit.
And I guess, what I'm really trying to understand is like what really changed versus 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 Q4, So I just would love to kind of get your sense.
Around what's really changed versus you know sort of a leaseback.
Yeah, Yeah. So just to clarify on one modest I think you know we're thinking low single digit.
Growth is as being modest and I think bill kind of said this earlier I mean look we we've gotten off to a start here in the first quarter that is in line with our guidance, but you know where.
The industry is certainly not yet on a tear we've seen some of our.
Competitors and other players in this space, you know struggle a bit with with growth as well.
So I think those things you know sort of air to the side of caution from our perspective.
You know.
Peter you know well this 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 was just kind of the confidence in the outlook as we stand today.
Sounds like.
Maybe I'm wrong, but it sounds like the cautious outlook, just simply being conservative some concerns conservatism given.
What we've seen of late is that fair or is it just.
You know more or more realistic of prudent based on where things stand today.
Yeah, I think it's realistic prudent and cautious right all altogether and you know, let's not forget everybody overlooks it but 71% two year stack. We're now lapping some monsters here I mean, we really that's not not to be overlooked as we're coming off the COVID-19 bump from a year year and a half ago. So that's that.
As important in this so we are being conservative and cautious because until it turns it hasnt 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 we decided to put out there sort of a range that we thought was very.
Very much down the middle of the fairway, we've got the momentum drivers I talked about with the commercial <unk> New states in I G E.
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 and offsetting mitigating mitigate you know the other thing Peter that I'm sure you're tracking like we all are as the 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 you know a growth.
Growers' willingness and interest to be in the category various price points. So I think the headset data showing modest tick up some pricing that's going to be good for everybody and.
So those are the things we're watching but we really haven't seen the turn yet that we would want to 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 one on your telephone keypad.
Our next question comes from Andrea <unk> with J P. Morgan. Please proceed with your question.
Thank you, but after now.
So I wanted to just go back to the kind.
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 that's is that something you are concerned at your customer level that may I strike two to become to 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 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 you know your I T O marching.
If you are not suffering from your cost pressure. So you can provide us with the cost pressure bridge.
That could potentially you could potentially lap and not not from China 22, but perhaps you know in 2023.
And then lastly, just a housekeeping.
You mentioned, a commercial tripled from last year, but how much are you embedding it to be a D. C. I just say that that's a fine point there. Thank you.
Yeah, I can start off bill with the SG&A piece and maybe you can backfill with some of the other plants, but yeah on SG&A on a year over year basis in the quarter It was up.
Up significantly as we called out in the press release, when we think of SG&A, we tend to point to adjusted SG&A. The.
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.
You know roughly $18 5 million versus 11, two last year the biggest.
Really sort of element of that bridge, which goes across these various buckets that we talked about it in the <unk>.
Our 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 pulled those in we're seeing 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 MJ Biz conference in.
Actually spent for a bit of a coming out party at that conference. This year and then at the year before we've got a full quarter of D&O insurance, which we didn't have last year facility costs, which we talked about and really professional fees for us for a little bit more in this quarter on a year over year basis, as we tried to knock out.
Did knock out sort of the full first year of Sox and other things that came with the getting you know five acquisition COSE embedded in our.
First 10-K, as an accelerated filer, which by the way it should be out an issue here later this evening. So those are the elements in the bridge.
We did as bill referenced in his prepared comments, we did do some reductions in force that will help to mitigate some of these cost challenges, but with the five with a full year of five businesses that we didn't know before.
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 topline pick back up I think we can 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 slowed down a bit I think.
All categories I mentioned.
Based on the California remarks.
It has slowed down a good bit there and you've seen that in other folks' results as well but.
But beyond that I think it's just normalize less demand I don't think it's really a backup in inventory on the commercial side, Yeah, we would triple the volume 'twenty to 'twenty, one 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% off or anything like that it's considering the low twenty's kind of percent growth on the commercial side for this year plus we got growth built into I G, which is closely tied to commercial but we don't look at it quite the same way. So those are the.
The numbers, we're expecting in those segments of the business for 2022.
And that commercial would be how much in total for them for the total company commercial representing.
She was smaller percentage if I just wanna.
Yeah.
When commercial and AG, it's going to be in the kind of the 20 mid twenties percentage of a company.
Of the total okay, sorry, I thought you were saying about the girl Okay perfect. Thank you.
And now I, just gave you a percentage of sales versus the growth numbers happen to be very similar numbers, but different number yep.
Alright, Thank you I'll pass it on.
Alright.
Our next question is from Nicole with the place with Deutsche Bank. Please proceed with your question.
Yeah. Thanks, good afternoon guys.
Cool.
Maybe we could just focus on pricing one more question on that how is the competitive pricing dynamic look 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 can move into an environment where cost start to come down will you then be 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.
Yeah, 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.
So it's it's a it's also an incredibly complicated business, we sell 6000, skus so to contract pricing and percentage changes all of those skus all the time from 400 suppliers around the world. It it definitely gets through and get through pretty cleanly Ah and retailers are happy.
Take price people are you know willing to two cost up as high as they have to were trying to make sure. We reflect for the things that are affecting our P&L and we're not trying to expand gross margin, we're simply trying to expand the pass through the pricing that we're seeing you know affect us.
Okay got it thanks, and just as a follow up that's 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 EBITA margins is that also similar to organic growth starting off with the low point of the year and then improving sequentially from there.
Yeah, I can get five millimeter, yes no.
But for sure you picked up on the call out that.
We expect Q1 margins to be something.
Something similar to what we witnessed in Q4 2021, so that should be our low point from a margin standpoint across the quarters in the year. The only 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 one and four are that has a little bit to do with sort of the topline and the economies of scale as well as mix of products during those periods.
And I think we would expect that to hold true to here in 2022 based on what we're seeing now.
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. Cola for closing remarks.
Alright, Thank you very much Maria and we appreciate your interest in hydro from 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.
Okay.
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