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 fourth quarter and full fiscal year ended December 31, 2020.
Fourth Quarter 2020 Highlights vs. Prior Year Period:
- Net sales increased 62.6% to $87.4 million compared to $53.8 million.
- Gross profit increased 190.5% to $16.0 million, or 18.3% of net sales, compared to $5.5 million, or 10.2% of net sales.
- Net loss attributable to common stockholders was ($10.0) million or ($0.43) per diluted share compared to a net loss of ($17.7) million or ($0.86) per diluted share. Pro forma adjusted net income(1) was $0.5 million, or $0.02 per pro forma diluted share compared to a loss of $(9.6) million, or $(0.29) per pro forma diluted share.
- Adjusted EBITDA(1) was $5.0 million compared to a loss of ($5.7) million.
Fiscal Year 2020 Highlights vs. Prior Year:
- Net sales increased 45.6% to $342.2 million compared to $235.1 million.
- Net loss attributable to common stockholders was ($9.9) million or ($0.46) per diluted share compared to a net loss of ($40.1) million or ($1.94) per diluted share. Pro forma adjusted net income(1) was $7.3 million, or $0.21 per pro forma diluted share compared to a loss of $(22.6) million, or $(0.68) per pro forma diluted share.
- Adjusted EBITDA(1) was $21.1 million, compared to a loss of ($9.5) million.
Full Year 2021 Outlook vs. Prior Year:
- Organic net sales growth of 20% to 25%.
- Adjusted EBITDA(1) estimated at $28.0 million to $31.0 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, “Fiscal 2020 was an excellent year for Hydrofarm in many ways. First, our organic sales growth across the year was outstanding, increasing in each sequential quarter and culminating in over 60% year-over-year growth in each of our last two quarters as our entire company worked feverishly throughout the COVID-19 pandemic to meet the growing demand in the CEA industry. We also raised our profit margin profile during the year by implementing several management initiatives which resulted in a considerable improvement in our Adjusted EBITDA margin compared to the prior period. Simultaneously, our leadership team completed our highly successful initial public offering (“IPO”), which culminated in our first day of trading on NASDAQ on December 10th, under the ticker, HYFM. I could not be more proud of our entire team.”
Mr. Toler added, “Looking ahead into 2021, we expect robust CEA industry demand will result in organic net sales growth well above the long-term company expectations outlined during our IPO roadshow. We also will continue to evaluate acquisition candidates leveraging our strong balance sheet position, and seek to further improve our profit margin profile to drive long-term value for our shareholders.”
Initial Public Offering
On December 14, 2020, the Company successfully completed its IPO of common stock at $20.00 per share. The Company issued 9,966,667 shares of common stock, including the full exercise by the underwriters of their option to purchase 1,300,000 additional shares of common stock. The Company received net proceeds from the offering of approximately $182.3 million after underwriter discounts and commissions and offering expenses. The net proceeds from the offering were used to repay debt, increase cash holdings and reposition the Company’s capital structure for future growth.
Fourth Quarter 2020 Financial Results
Net sales in the fourth quarter of 2020 were $87.4 million, an increase of $33.7 million or 62.6% compared to the fourth quarter of 2019, driven by an approximate 59% increase in volume of products sold and an approximate 4% 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 Michigan, Oklahoma, California, 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 $10.5 million or 190.5% to $16.0 million compared to the fourth quarter of 2019, primarily driven by an increase in net sales and an approximate 810 basis point improvement in gross margin to 18.3% compared to 10.2% in the fourth quarter of 2019. Gross profit in last year’s fourth quarter was impacted by an estimated $2.8 million in inventory adjustments and write-downs primarily associated with our 2019 SKU rationalization initiative. Excluding the impact of last year’s inventory adjustments and write downs, year-over-year gross profit as a percentage of net sales improved approximately 280 basis points, driven primarily by a more favorable sales mix of proprietary and preferred branded products which typically carry a higher gross margin.
Selling, general and administrative (“SG&A”) expense was $21.4 million in the fourth quarter of 2020 compared to $13.0 million in the fourth quarter of 2019. As a percentage of net sales, SG&A increased to 24.5% from 24.2%. The increase in SG&A was primarily related to increases in IPO-related share-based compensation, in addition to higher management salaries and professional fees 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 12.8% of net sales from 20.7% of net sales in the prior year period.
Net loss attributable to common stockholders was ($10.0) million or ($0.43) per diluted share in the fourth quarter of 2020 compared to a net loss of ($17.7) million or ($0.86) per diluted share in the fourth quarter of 2019. Pro Forma Adjusted Net Income(1) was $0.5 million, or $0.02 per pro forma diluted share in the fourth quarter of 2020 compared to a loss of ($9.6) million or ($0.29) per pro forma diluted share in the fourth quarter of 2019.
Adjusted EBITDA(1) increased $10.6 million to $5.0 million, or 5.7% of net sales, for the fourth quarter of 2020 from ($5.7) million, or (10.6%) in the fourth quarter of 2019. 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 expenses, excluding stock-based compensation and depreciation/amortization.
Balance Sheet and Liquidity
As of December 31, 2020, the Company had $1.0 million of interest-bearing debt outstanding, $75.2 million in unrestricted cash and cash equivalents and up to $45.0 million in total borrowing capacity under its existing revolving credit facility. The Company anticipates approximately $56.0 million available in additional equity capital from the future exercise of Investor Warrants by the Investor Warrant holders. Upon the full exercise of all outstanding Investor Warrants, the Company would expect the net proceeds to be used to accelerate its growth plans, including potential future acquisitions.
Subsequent to our fiscal year end, on March 29, 2021, the Company entered into a senior secured revolving credit facility with JPMorgan Chase Bank, N.A. The new JPMorgan Credit Facility replaced the Company’s existing revolving credit facility (the “JPMorgan Credit Facility”). The new three-year JPMorgan Credit Facility has a borrowing limit of $50 million and the Company has the right to increase the amount of the facility in an amount up to $25 million. Additional details regarding the JPMorgan Credit Facility may be found in the Company’s Annual Report on Form 10-K for the year ended 2020.
Full Year 2021 Outlook
John Lindeman, Chief Financial Officer of Hydrofarm, stated, “We are off to a strong start in 2021 with net sales growth year-to-date roughly on par with levels realized during our recently ended fourth quarter of 2020. Based in part on this strong start, we are currently estimating 20% to 25% organic net sales growth in fiscal 2021. We expect outsized growth in the first half to moderate in the second half of 2021 as we begin to lap particularly strong comparable periods in the third and fourth quarter. We also expect this growth will be dominantly driven by volume in conjunction with broader demand themes in the CEA industry; though we do anticipate that commodity cost inflation may result in some price increases across the industry during the year.”
Mr. Lindeman added, “Similar to our results in 2020, we anticipate our ongoing initiatives to drive favorable sales mix of our proprietary and preferred brands, and to drive operating leverage on our SG&A expenses, excluding stock-based compensation and depreciation/amortization, leading to Adjusted EBITDA margin expansion.”
For full year 2021, the Company’s is providing the following guidance:
- Organic net sales growth between 20% and 25% with stronger growth in the first half and moderating growth in the second half.
- Adjusted EBITDA(1) estimated at $28.0 million to $31.0 million representing further margin expansion to approximately 6.8% to 7.2%.
(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.
In addition to the risks and uncertainties identified below under our “Cautionary Note Regarding Forward-Looking Statements”, our 2021 guidance is also based on the following assumptions:
- 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 $3.5 to $4.5 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 fourth quarter of 2020 today at 5:00pm 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 Tuesday, April 6, 2021 and can be accessed by dialing 1-412-317-6671. The passcode is 13717234. The conference call will also be webcast live and archived on the corporate website at www.hydrofarm.com, under the “Investors” section.
