Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hydrofarm Holdings Group First Quarter 2021 Earnings Conference Call. Please note that this conference is being recorded today, May 13, 2021. I will now like to turn the call over to Mr. Fitzhugh Taylor, Managing Director at ICR to begin.

Thank you, Shamali, and good afternoon. With me on the call today is Bill Toler, Hydrofarm’s Chairman and Chief Executive Officer; and John Lindeman, the company’s Chief Financial Officer. By now everyone should have access to our first quarter 2021 earnings release and Form 8-K 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 formal remarks, please note that our discussions today will include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. 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 would now like to turn the call over to Bill Toler. Bill?

Thank you, Fitzhugh, and good afternoon, everyone. We are pleased with the continued momentum in our business as Q1 revenues grew 66.5% versus last year, completing our third straight quarter of organic sales growth greater than 60%. We’re also pleased to report a record adjusted EBITDA of $9.9 million, an increase of over 500% from last year’s first quarter. Our revenue growth was once again across virtually all of our product lines and geographies. This includes both new markets and mature markets and is across the board and virtually all of our brands and categories. As demonstrated by our EBITDA growth, we continue to benefit from a favorable sales mix as our proprietary brands are becoming a larger part of our total sales and that drives margin expansion. Our exciting growth also gave us leverage on SG&A; despite the fact we’re spending more actual dollars in SG&A, our percentage of total went down. The strength of our results, not only in this quarter but over the last year, are indicative of our unique positioning as a leading distributor and manufacturer of differentiated branded hydroponic supplies, serving a $9.5 billion controlled environment agriculture market. As many of you know, it’s a market that we believe is in the early innings of a sustainable and significant growth curve brought on by a broad-based increase in home hydroponic gardening, ongoing domestic legislative approvals related to cannabis, and advances in innovation, technology, and brand strength within the category. We also believe longer-term the ESG advantages of hydroponics are becoming more mainstream and these efficient farming practices will continue to expand. While we are operating with a strong tailwind, it is worth noting that our differentiated branded offerings are a driver of our results. Over 60% of our sales come from products that you primarily purchase in the hydroponic channel from Hydrofarm. Not only does it give us the stickiness we want, as successful growers tend to stay with the brands that give them their own differentiated formula, but these products also drive advantageous margins for us. That formula is evident in the profitability improvement we displayed over the last few quarters. As we look ahead, our focus will remain on three growth drivers: product innovation and brand building, adding strategic distribution relationships, and the acquisition of value-enhancing businesses. Let me quickly touch on the first two before talking about our recent acquisition. First is the commitment to innovation and brand building. As you know, we currently have a little more than 60% of our sales in proprietary and preferred brands, the bulk of which is in our own proprietary brands. With better margin profiles, our proprietary brands represent a key growth opportunity. A great example of that is our innovation in our new PhotoBio by Phantom led lights that we began selling broadly late in Q1. Building on the success of the PhotoBio MX form factor, our continued push for innovation has led us to the recent unveiling of the PhotoBio T and the PhotoBio TX, both lights we started selling late in the first quarter. We believe these two products are smart and affordable investments for growers looking to successfully cultivate all types of crops in controlled environment agriculture. We also introduced additional proprietary and preferred brands in the first quarter, including products and supplies, nutrients, and the grow media categories. This included the brand launch from GrowthStar, a new line of premium lab-grade testers for soil, as well as new products under existing brands like Autopilot, Plant Success, Rock Nutrients, and Roots Organics. The newest additions were all developed by either our in-house product development team or our partner suppliers' product development teams, or together to further expand our portfolio of innovative proprietary branded products. Secondly, we continue to focus on adding strategic distribution relationships and preferred brands to our portfolio. As we previously mentioned in early February, we signed a new exclusive distribution agreement in Canada with Advanced Nutrients, one of the largest and most respected nutrient brands in the CEA space. This strategic partnership has allowed us to offer best-in-class nutrients that will be available to Canadian growers who are eager to unlock the true genetic potential of their crops and introduce the highest quality products to their markets. By the end of the first quarter of 2021, Advanced has already become one of our fastest-selling brands in Canada. Lastly, one of our top priorities is to acquire value-enhancing businesses to broaden our industry footprint and strengthen our product portfolio. While we remain opportunistic across all product segments, we have been focused on the nutrients and grow media categories in particular, largely because these product categories are consumables for our growers and recurring revenue for Hydrofarm and our retail partners. Additionally, many of these brands have very healthy EBITDA margins and are categories where we currently don’t have our own strong proprietary brands. To that end, in late April, we announced the acquisition of HEAVY 16, a leading and highly respected manufacturer and supplier of plant nutritional products used in all stages of plant growth to help increase the yield and quality of the crops. In addition to being a highly compatible and complementary business within our existing product line, HEAVY 16 has a compelling financial profile with strong revenue growth and impressive margins, and we expect it to be accretive to our adjusted EBITDA this year and beyond. We believe we have an excellent opportunity to expand the HEAVY 16 footprint as a product line, which is currently only sold at about 300 of the 1,200 stores in the U.S., and 90% of its sales are in just four states. We are excited to welcome the talented HEAVY 16 team into the Hydrofarm family. We believe this acquisition fits well as a proprietary brand for Hydrofarm in the nutrient category and will further solidify our position as the acquirer of choice in this highly fragmented and fast-growing industry. I hope you can see we are hard at work executing strategies we laid out back in December at our IPO. With the recent successful completion of our secondary offering of common stock and the increased borrowing capacity we have from our new credit facility, we have further strengthened our balance sheet since we became public. As a result, we are well positioned to continue to invest in our organic growth, as well as execute our acquisition strategy going forward. Coupled with our innovative high-performing products and our own strong service offerings, we believe we are uniquely positioned to capitalize on unprecedented growth in CEA, and we are convinced we've only scratched the surface of the opportunity in front of us. Now I'll turn it over to John to discuss the first quarter financial results in detail and to provide some updates on our 2021 guidance. John?

Thanks, Bill, and good afternoon, everyone. We are very pleased to report first quarter 2021 results that included a record quarter for Hydrofarm in terms of sales and adjusted EBITDA. Net sales for the first quarter increased 66.5% to $111.4 million from $66.9 million in the prior year period. Our top-line growth continues to be predominantly volume-driven, with increased demand across multiple end markets. To give you some perspective on how broad and diverse the growth in the quarter was, we experienced over 100% year-over-year sales growth in 15 different U.S. states. While some of these states are still relatively modest in dollar terms today, we expect our sales in many of these states to continue to grow significantly in size over the coming quarters and years. Our sales growth in the first quarter was also particularly strong in our proprietary brands, which outpaced our preferred and distributed brands. We also saw gross profit more than double to $23.2 million in the first quarter compared to the same period last year, and gross profit margin improved to 20.8% from $17.3 million. This year-over-year improvement in gross profit margin was primarily driven by a sales mix more heavily weighted towards proprietary branded products, which typically carry a higher profit margin than pure distributed brands. We also achieved incremental labor efficiency related to scale benefits in internal initiatives within our own distribution centers, which further enhanced our gross profit margin. Selling, general, and administrative expenses increased to $16.8 million in the first quarter of 2021 compared to $11.7 million in the year-ago period. The increase in SG&A was primarily due to increased costs associated with running a public company and supporting our long-term growth strategy. Specifically, we realized higher compensation costs, consulting fees, including acquisition-related costs, insurance costs, and share-based compensation expenses. Excluding share-based compensation and depreciation, amortization expenses, SG&A was $14.2 million or 12.7% of net sales versus $10.1 million or 15.1% of net sales in the prior year period. On this comparative basis, we realized significant operating leverage in the quarter. Reported net income attributable to common stockholders was $4.9 million or $0.13 per diluted share in the quarter, compared to a net loss of $3.7 million or $0.18 per diluted share last year. Weighted average diluted shares outstanding were approximately $39 million for the first quarter of 2021 and approximately $20.7 million for the prior year period. Please note that during the prior year share count does not reflect the impact of our December 2020 IPO. 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. The precise calculations detailed in our earnings release on the page containing the reconciliation of non-GAAP measures. We believe the additional information contained in this non-GAAP measure could be helpful in comparing prior periods. On this basis, pro forma adjusted net income for the quarter was approximately $7.3 million or $0.19 per performance diluted share compared to a loss of $1.6 million or $0.05 per pro forma diluted share in the year-ago period. Lastly, adjusted EBITDA increased over five-fold to $9.9 million or 8.9% of net sales for the first quarter of 2021 versus $1.6 million or 2.4% of net sales in the prior year period. Higher sales, the improvement of gross profit margin, and further leverage on our SG&A expenses all contributed to the record adjusted EBITDA in the first quarter. Moving onto our balance sheet and overall liquidity position, as of March 31, 2021, we had $62 million in cash, cash equivalents, and restricted cash, $50 million of available borrowing capacity under our existing credit agreement, and only $1.1 million in aggregate amount of outstanding debt. Subsequent to the quarter end, we completed a follow-on equity offering raising approximately $310 million in net cash proceeds to the company. We also completed the HEAVY 16 acquisition, which resulted in a cash use of approximately $61 million. When you consider the equity offering, the HEAVY 16 acquisition, our cash position at quarter end, the availability under our current debt agreement and as much as $57 million in additional proceeds to the company from the future exercise of investor warrants, we currently have over $400 million available to deploy against the growth strategy that Bill outlined earlier. Before we open the lines for questions, let me quickly review our revised 2021 outlook. Based on the strong start to 2021 and the recent completion of our HEAVY 16 acquisition, we are updating our outlook for the full year. We are now expecting total company net sales growth of 30% to 40% for the 12-month period ending December 2021 and adjusted EBITDA of $36 million to $42 million for the same period. We continue to expect the stronger year-over-year growth in the first half of 2021, relative to the second half, as we will be lapping strong comparable periods in the third and fourth quarters of 2021. And while our revised outlook for the full year implies a stronger adjusted EBITDA margin than our prior outlook, we remain somewhat cautious about further margin expansion as we move across the quarters for the remainder of 2021 due in large part to the overall commodity cost environment. In the earnings release earlier today, we noted select assumptions embedded in our 2021 outlook. There was only one change in the outlook assumptions from those previously presented in March, and that relates to a $0.5 million increase in our CapEx to approximately $4 million to $5 million for the full year to account for additional growth capital expenditures at the HEAVY 16 manufacturing plant. As you can see from the quarter results and our recently completed capital raise and the HEAVY 16 acquisition, we remained very active in executing against our growth plan. We look forward to reporting our progress again next quarter.

Our first question is from Andrew Carter with Stifel. Please proceed with your question.

Thanks. Good afternoon. I appreciate that you have a more subdued margin outlook for the remainder of the year, given some caution around the input cost environment, but you've achieved an 8.9% EBITDA margin in the first quarter, seemingly higher than your updated 7.8%, 8.7%. So I just want to help us understand that caution. Is it caution over mix? Yes, there's inflation, but you've gotten pricing. And then in particular, will the HEAVY 16 acquisition be EBITDA margin accretive here in year one? Thanks.

Okay. I'll jump in on that one, Andrew. Thanks for the question. Yes, well look, I mean, we did just report an all-time record quarter, and we do not believe we have yet seen the full impact of the overall commodity cost environment. For example, our new LTL freight rate, which we locked in for the remainder of 2021, is set to rise here in Q2. This is a fairly easily identifiable cost that we know is rising, but there may be other rising costs coming our way across the roughly 6,000 SKUs that we sell. As we discussed before, we can take an inventory position to buy us some time. We can also consider price increases to help mitigate some of these rising costs. Given the overall environment, we thought it seemed appropriate to guide in the manner that we have at this point. And yes, we do believe that the HEAVY 16 acquisition will be accretive.

Thanks. If I could circle in just a little bit on that, I guess, could you talk about how this acquisition fits in with the future acquisition expectations around nutrient advance? Do we think of this as like a platform asset with the manufacturing capacity to onboard other nutrient brands, potentially realizing the synergies quickly, or instead where you need the manufacturing capacity to keep up with the growth of HEAVY 16 as well as potential businesses you're onboarding? Thanks.

Yes. It’s a good question, Andrew, and thank you. Yes, we're going to need more than just HEAVY 16 to really have a full platform in nutrients. It's a fantastic business; it's in a brand new, but relatively small physical facility in Los Angeles. The nutrient industry ships a lot of water, which is very expensive. Ultimately, I'd like to think of a world where you had regional capability to produce and ship things a lot less distance and with a lot less water moving around, because I think that's a better model for the longer term. The specific answer to your question is it's a nice start for building a platform, but there's more that needs to be done to give us the kind of the full range that we would like to have.

Thanks, Bill. I will pass it on.

Our next question is from Andrea Tiexeira with JPMorgan. Please proceed with your question.

Thank you. Good afternoon. I just wanted to go back to the guidance and try if my follow-on math is correct. I think you're looking at a $15 million contribution from HEAVY 16 for sales. So, correct me if I'm wrong. Your guidance probably implies about 26% to 36% organic growth for 2021. If you can help us figure that out, I think you've got about 6% growth in pricing, if you can decompose that. And also decompose the EBITDA guidance increase between organic and HEAVY 16?

Yes, sure. I'll jump in. Thanks, Andrea for the question. Yes. I mean, in terms of the organic growth split versus M&A, which is really at this point HEAVY 16, I think the numbers you've mentioned are certainly in the ballpark. I would say in terms of the EBITDA guidance, you can decompose the math on HEAVY 16 based on sort of the breadcrumb trail we left in the press release for the signing announcement on HEAVY 16. I think when you do that, you can imply that our organic EBITDA is quite strong and it's certainly a guide-up from what we had previously provided back at the end of March.

Yes. I can take it offline, but it's consistent with what you said is a pretty high EBITDA margin, right? So, when I'm thinking about how accretive it is, and not only that, considering your commentary about freight and commodity costs in general, should we expect you to build into that 6%? I think it was 6% that I signed that would be used right on pricing; so if you can build into that and group pricing as well? Therefore, you have some cushions for the celebration in volumes into the back half.

Yes. There has been some cost increases, as John outlined. I mean, obviously, bottles with resin going up have gone up a good bit. There's a lot of pressure on numerous things. The other piece that we're having trouble with is labor, not just the cost of labor, but just physically getting people to find and hire. That's adding cost to there as we're trying to accelerate the production capability at HEAVY 16. The overall distribution network is experiencing pressure as well. Yes, you could assume that there has been pricing in the category. We generally work very hard to make sure we price through all cost increases we receive from our supply base. You can expect us to do that when we see them coming through. There will be some pricing going forward, but it's a challenging time. I appreciate Andrew's question regarding the overall margin mix question; we are being cautious because the unknowns are where the challenges have come. We fought a lot of it off in Q1 and secured a great margin. We had some pent-up demand on some profitable products that got shipped out in March. So we probably got a little ahead of ourselves for the year on the margin there. Overall, we feel good about where we sit and believe the evolution is coming through as we had hoped.

Yes. That's it. And you're seeing the competitors doing the same testing on these price increases.

Yes. Yes. There has been some pricing from quite a few factors in the categories we compete in.

Perfect. I'll pass it on. Thank you again.

Thanks, Andrea.

And our next question is from Kevin Marek with Deutsche Bank. Please proceed with your question.

Good afternoon. Thanks for the question. I'm just wondering if you can comment on trends exiting the quarter, kind of what you've seen in April and through the first two weeks of May. Q2 obviously has tougher comps, and something about framing growth as we progress through the year.

Yes. The absolute volume level has stayed if not very consistent with Q1, actually it's kicked up a bit as you would expect as we go into our Q2, which is our strongest volume quarter, Q2 and Q3. But we're running up against bigger comps. As we had cautioned before the year, we had a plus 20 in Q1 that we just slapped with a plus 66; our Q2 was plus 40 last year, and we’re now lapping. Then we hit 260s in the back half. Absolute volumes are continuing to, I would say, seasonally adjust in our larger, which is great, but we are running up against bigger comps from last year.

Got it. Understood. And then kind of within that growth that you are seeing, are there varying trends between some of the categories that are worth noting? I mean, in the prepared remarks, I noted that you said growth was broad-based, but I'm wondering if there's anything to call out.

Yes, I would say that frankly, we've had a very good year on our equipment categories on a couple of key brands. Grow media, even though it had a wonderful year last year, is doing the same thing again. The nutrient side of it remains real strong. I mean, the growth is differentiated by category, but they're all kind of in a similar place, having a year where you start out with plus 66%; everything's doing pretty well.

Right. I appreciate that. It's a good place to be. Actually, just one more, if I could tack it on, the M&A environment, what does your pipeline look like? What kinds of conversations are you having on the heels of HEAVY 16 and your stronger balance sheet? Any update there would be great. Thanks.

Yes. The pipeline is still very good. There's a lot of interest in activity in several of these deals right now, more than there was six months ago. I think us coming out in the situation that we were in, then doing the secondary, then doing HEAVY 16, it has shown people that we are serious about doing deals, and we're going to be adding businesses. The market's very competitive for these kinds of assets, particularly ones that have the growth and profit profile and the opportunity to enter a massive category like controlled environment agriculture and the supplies for that. I would say it's a very good pipeline that we're working with, but there's a lot of people that have interest in the categories as well.

Understood. I appreciate it. Thank you.

And our next question is from Jon Andersen with William Blair. Please proceed with your question.

Good afternoon. Thanks for the question.

Hey Jon, how are you?

Hi. Good, good. Congrats on a strong start, by the way. I wanted to just ask about the mix of the business across brand segments? Sounds like you were strong across the board, but could you talk a little bit more about maybe the relative strength of the proprietary brand versus the preferred and distributed? Are you seeing, where you are from an overall mix perspective now, and maybe what you’re targeting or what you think would be an optimum mix a couple of years down the road when you hit more of a run rate level?

Yes. Our proprietary brands are growing a good bit faster than our distributed brands right now. That’s a very good thing for our P&L, and that’s one of the things that has driven the margin in Q1. We have historically been in the low 30’s as a percent of total proprietary, and numbers have now moved up to mid to high-30’s, if you will. We’ve even had a month over 40%. That’s the trend we’re seeing sort of 300 to 400 basis points of expanded penetration in proprietary, which is key for us to keep remixing the margins. Our goal via M&A, innovation, and focus would be to get that number into the 40’s and 50’s. If you talk about three to five years from now, I’d like to be 60% or greater in our own brands. That’s not to say that partner, preferred, and distributor brands aren’t important, but to give us control over our own destiny and to drive our own brand differentiated success with our retail customers and ultimately with growers, we need to have our own innovation and our own brands. We do that beautifully and combine it with what our partner brands do, giving us that scale and that frequently-shop product that we know we can distribute very efficiently and effectively. These two things work hand in glove and they don’t have to work against each other.

Yes. That makes sense. Just one more for me. On HEAVY 16, you mentioned it's available in 300 of the 1,200-some odd hydroponic stores across the country and is fairly concentrated on a state basis. Could you talk about why that is? And what you can do, and over what kind of timeframe to positively affect that?

Yes. No, it’s a good question. It was kind of a surprise to us because the business got started in California, so it’s not surprising that it’s strong in California. They also got into Michigan very early and did a great sampling and selling demo program there. Word of mouth and relationships got the product exposed to other customers and growers. Michigan went really well. Oklahoma opened up rapidly, and everybody did well there. Colorado is the fourth state where they do really well. It gives you a sense that Colorado has obviously been around for a long time. Our goal is to take this into other states with the Michigan model they used when they launched there a few years ago to get the product into people’s hands, to work with our retail partners and growers locally in each market to create opportunities for people to use HEAVY 16 that may not have heard of it or don’t understand its simplicity, the elegance of the brand and how it works, and the simple two-part formula that it represents. All those things are the way to get a brand like this launched into new markets. We had a call today with our sales team and started talking about the retail implementation of this. We’re keeping all the HEAVY 16 salespeople to maintain their category expertise while our folks will be the generalists. We’ll keep building this brand together and building all of our nutrient partner brands as well, because we can take more of a category management approach to this versus an individual brand approach.

Absolutely. Thanks for the help on it. Good luck going forward.

Thanks, Jon.

We have reached the end of the question-and-answer session. I will now turn the call back over to management for closing remarks.

That’s great. Thank you all very much for being a part of the call today. I’m glad to get Q1 in the books and tell you about it. We look forward to more good news down the road. Thanks so much. Take care.

This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.