Hydrofarm Holdings Group, Inc. (“Hydrofarm” or the “Company”) (Nasdaq: HYFM), a leading independent distributor and manufacturer of hydroponics equipment and supplies for controlled environment agriculture (“CEA”), today announced financial results for its first quarter ended March 31, 2021.
First Quarter 2021 Highlights vs. Prior Year Period:
- Net sales increased 66.5% to $111.4 million compared to $66.9 million.
- Gross profit increased 100.8% to $23.2 million, or 20.8% of net sales, compared to $11.6 million, or 17.3% of net sales.
- Net income attributable to common stockholders was $4.9 million or $0.13 per diluted share compared to a net loss of ($3.7) million or ($0.18) per diluted share. Pro forma adjusted net income(1) was $7.3 million or $0.19 per pro forma diluted share compared to a loss of $(1.6) million or $(0.05) per pro forma diluted share.
- Adjusted EBITDA(1) increased to $9.9 million compared to $1.6 million.
Recent Developments:
- Completed follow-on equity offering raising approximately $309.8 million in net proceeds.
- Completed the acquisition of branded nutrient manufacturer, HEAVY 16.
Revised Full Year 2021 Outlook vs. Prior Year:
- Net sales growth of 30% to 40%.
- Adjusted EBITDA(1) of $36.0 million to $42.0 million.
| (1) | Adjusted EBITDA and Pro Forma Adjusted Net Income (Loss) are non-GAAP measures. For reconciliations of GAAP to non-GAAP measures see the ”Reconciliation of Non-GAAP Measures” accompanying this release. |
Bill Toler, Chairman and Chief Executive Officer of Hydrofarm, said, “We’re pleased to report strong results to start 2021, which included our third straight quarter of organic sales growth of approximately 60% or more and a new record quarter of Adjusted EBITDA at $9.9 million, as we continue to benefit from broad growth across our product lines, geographies, and brand categories. Our impressive results continue to be driven by demand for our differentiated branded product offerings aided by strong tailwinds from a large and rapidly growing controlled environmental agriculture end market.”
Mr. Toler added, “With the recent successful completion of our follow-on offering of common stock, and the increased borrowing capacity we have from our new credit facility, we have further strengthened our balance sheet since becoming public and 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 performance products, and strong service offerings, we believe we are uniquely positioned to capitalize on the unprecedented growth in CEA and we are convinced that we have only scratched the surface of the opportunity in front of us.”
Recent Developments
Acquisition of HEAVY 16
As previously announced, on May 3, 2021, the Company completed the acquisition of Field 16, LLC, the manufacturer and distributor of HEAVY 16, a line of premium plant nutrients (collectively “HEAVY 16”). The strategic combination of Hydrofarm’s leading distribution capabilities and HEAVY 16’s branded nutrient manufacturing capabilities is expected to enable the HEAVY 16 brand to grow more rapidly across the combined company’s customer base. The acquisition also fits squarely with Hydrofarm’s strategy to acquire branded manufacturers in key CEA product categories, such as plant nutrients.
Follow-on Offering of Common Stock
Additionally, on May 3, 2021, the Company completed a public offering of its common stock. A total of 5,526,861 shares were sold in the offering at a price of $59.00 per share, including 720,894 shares sold pursuant to the full exercise of the underwriters’ option. All of the shares in the offering were offered by Hydrofarm. The net proceeds to the Company from this offering, after deducting the underwriting discounts and commissions and offering expenses payable by the Company, were approximately $309.8 million.
First Quarter 2021 Financial Results
Net sales in the first quarter of 2021 were $111.4 million, an increase of $44.5 million or 66.5% compared to the first quarter of 2020, driven by an approximate 59.6% increase in volume of products sold and an approximate 6.9% increase in price/mix of products sold. The growth in volume of products sold was related to increased demand from multiple end-markets, including, but not limited to, California, Oklahoma, Michigan and Canada, and higher demand across each of our Proprietary, Preferred and Distributed brand categories. The increase in price was primarily related to list price increases and more effective sales incentives.
Gross profit increased $11.7 million or 100.8% to $23.2 million compared to the first quarter of 2020, driven by the increase in net sales and an approximate 350 basis point improvement in gross margin to 20.8% compared to 17.3% in the first quarter of 2020. The year-over-year improvement in gross margin resulted primarily from a more favorable sales mix of proprietary products which typically carry a higher gross margin than our preferred and distributed branded products.
Selling, general and administrative (“SG&A”) expense was $16.8 million in the first quarter of 2021 compared to $11.7 million in the first quarter of 2020. As a percentage of net sales, SG&A expense improved to 15.1% from 17.5%. The increase in SG&A expense was primarily related to higher management salaries, professional fees, insurance costs, and share-based compensation as a result of the Company’s growth and transition to a public company. SG&A expense, excluding share-based compensation and depreciation/amortization expenses, decreased to 12.7% of net sales from 15.1% of net sales in the prior year period.
Net income attributable to common stockholders was $4.9 million or $0.13 per diluted share in the first quarter of 2021 compared to a net loss of ($3.7) million or ($0.18) per diluted share in the first quarter of 2020. Pro Forma Adjusted Net Income(1) was $7.3 million or $0.19 per pro forma diluted share in the first quarter of 2021 compared to a loss of ($1.6) million or ($0.05) per pro forma diluted share in the first quarter of 2020.
Adjusted EBITDA(1) increased over 500% to $9.9 million, or 8.9% of net sales, for the first quarter of 2021 from $1.6 million, or 2.4% of net sales, in the first quarter of 2020. The improvement in Adjusted EBITDA was driven by an increase in net sales, the improvement in gross profit margin and leverage realized on SG&A expense, excluding stock-based compensation and depreciation/amortization expenses.
Balance Sheet and Liquidity
As of March 31, 2021, the Company had cash of approximately $62.0 million and an aggregate principal amount of debt outstanding of $1.1 million, as well as $50.0 million of available borrowing capacity under its revolving credit facility. The Company received approximately $309.8 million in net proceeds from the aforementioned follow-on equity offering completed on May 3, 2021 and anticipates receiving approximately $56.8 million available in additional equity capital from the future exercise of Investor Warrants by the Investor Warrant holders. The Company expects the net proceeds from the recent equity offering and the future exercise of the Investor Warrants to be used to accelerate its growth plans, including potential future acquisitions.
Full Year 2021 Outlook
In light of recent performance and completion of the HEAVY 16 acquisition, the Company is providing the following updated guidance for the full year 2021:
- Net sales growth between 30% and 40% with stronger growth in the first half and moderating growth in the second half.
- Adjusted EBITDA(1) of $36.0 million to $42.0 million representing full year margin expansion to approximately 8.1% to 8.9%.
| (1) | Adjusted EBITDA is a non-GAAP measure. For reconciliations of GAAP to non-GAAP measures see the ”Reconciliation of Non-GAAP Measures” accompanying this release. |
The Company’s 2021 outlook includes the following assumptions, which largely remain unchanged:
- Additional annual facility expenses of approximately $2.0 to $3.0 million, of which approximately half will impact fiscal 2021, as we expand our distribution center footprint by over 25% over the course of the year;
- Capital expenditures of approximately $4.0 to $5.0 million (up from $3.5 to $4.0 million); and
- An effective tax rate of 12% to 16% of pre-tax book income.
With respect to projected fiscal year 2021 Adjusted EBITDA, a quantitative reconciliation is not available without unreasonable effort due to the variability, complexity and low visibility with respect to certain items, including, but not limited to, stock-based compensation and employer payroll taxes, uncertainties caused by the global COVID-19 pandemic, changes to the regulatory landscape, and certain potential future transaction expenses, which are excluded from Adjusted EBITDA. We expect the variability of these items to have a potentially unpredictable, and potentially significant, impact on our future GAAP financial results.
Conference Call
The Company will host a conference call to discuss financial results for the first quarter of 2021 today at 5:00 p.m. Eastern Standard Time. Bill Toler, Chairman and Chief Executive Officer, and John Lindeman, Chief Financial Officer, will host the call.
The conference call can be accessed live over the phone by dialing 1-201-389-0879. A replay will be available after the call until Thursday, May 20, 2021 and can be accessed by dialing 1-412-317-6671. The passcode is 13718921. The conference call will also be webcast live and archived on the corporate website at www.hydrofarm.com, under the “Investors” section.
