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 second quarter ended June 30, 2021.
Second Quarter 2021 Highlights vs. Prior Year Period:
- Net sales increased 46.7% to $133.8 million compared to $91.2 million.
- Gross profit increased 65.5% to $29.6 million, or 22.1% of net sales, compared to $17.9 million, or 19.6% of net sales.
- Net income attributable to common stockholders was $2.3 million or $0.05 per diluted share compared to a $1.9 million or $0.08(1) per diluted share. Pro forma adjusted net income(2) was $12.5 million or $0.30 per pro forma diluted share compared to $4.0 million or $0.12 per pro forma diluted share.
- Adjusted EBITDA(2) increased 127.5% to $16.2 million compared to $7.1 million.
- Completed two acquisitions during the quarter: HEAVY 16 and House & Garden.
Recent Developments:
- Completed two acquisitions subsequent to quarter end: Aurora Innovations and Greenstar Plant Products.
- Completed Investor Warrant redemption, raising approximately $56.8 million in gross proceeds.
Revised Full Year 2021 Outlook vs. Prior Year:
- Significant increase in full year outlook with contribution from the four completed acquisitions.
- Net sales growth of 45% to 50%; Adjusted EBITDA(2) of $55.0 million to $62.0 million.
- Pro Forma(3) net sales $565 million and $590 million; Adjusted EBITDA(2)(3) of $80 million to $90 million.
(1) Net income attributable to common stockholders after adjustment for assumed conversions of $0.2 million.
(2) 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.
(3) Pro Forma net sales and Pro Forma Adjusted EBITDA assumes that all four acquisitions had occurred on January 1, 2021.
Bill Toler, Chairman and Chief Executive Officer of Hydrofarm, said, “We maintained momentum during the second quarter, as demonstrated by 47% increase in our top-line and significant improvement in our Adjusted EBITDA, which more than doubled on a dollar basis and increased considerably on margin basis. Our team also successfully executed against our acquisition strategy, completing four acquisitions during and subsequent to the second quarter, bringing four fantastic businesses in the nutrient and grow media categories under the Hydrofarm umbrella. These acquisitions not only help expand our proprietary consumable offerings and manufacturing prowess, but also demonstrate our position as the acquirer of choice in this highly fragmented industry. With positive top-line momentum, the execution of our multi-faceted strategy to increase our proprietary and preferred brand penetration via acquisition and in-house growth, while also boosting our robust commercial business, we believe Hydrofarm is uniquely equipped to capitalize on the long-term growth opportunity within the CEA industry.”
Recent Developments
Acquisition of Aurora Innovations
On July 1, 2021, the Company completed the acquisition of Aurora Innovations (together with several related entities, “Aurora”), a Eugene, Oregon-based manufacturer and supplier of organic hydroponic products. Through the Aurora acquisition, Hydrofarm added several key branded and self-manufactured products to its line-up, including Roots Organics and Procision grow media, Soul nutrients, Procision perlite and Aurora Peat Products soil mixes. The acquisition also added to the Company’s domestic manufacturing footprint with newly acquired manufacturing facilities located in the Northeastern and the Northwestern US along with a peat moss harvesting operation in Canada.
Investor Warrant Redemption
On July 19, 2021, the Company completed its previously announced redemption of its outstanding warrants to purchase shares of the Company’s common stock that were issued in connection with a private placement of units. Prior to the redemption date 3,367,647 Investor Warrants were exercised, generating approximately $56.8 million of gross proceeds to Hydrofarm and simplifying the Company’s capital structure.
Acquisition of Greenstar Plant Products
On August 3, 2021, the Company completed the acquisition of a Canadian nutrient company, Greenstar Plant Products, Inc. With this acquisition, Grotek, Gaia Green, Earth Safe and Supergreen plant nutrients will join Hydrofarm’s lineup of high performance, proprietary branded and self-manufactured products. Prior to the acquisition, Hydrofarm had a distribution relationship with Greenstar via a preferred brand agreement to sell the Grotek brand and a distribution agreement to sell the Gaia Green brands, with Hydrofarm’s distribution representing approximately 50% of Greenstar’s annual sales. This transaction is the second example of Hydrofarm’s ability to strategically onboard like-minded brand owners initially via a distribution relationship. The acquisition also adds a nutrient manufacturing facility in Western Canada to the Company’s facility footprint.
Second Quarter 2021 Financial Results
Net sales in the second quarter of 2021 reached an all-time quarter high at $133.8 million, representing an increase of $42.6 million or 46.7% compared to the second quarter of 2020, driven by an approximate 40.5% increase in volume of products sold (including sales from acquisitions closed within the quarter and preferred brands added in the year-to-date period), an approximate 3.5% growth from favorable foreign exchange rates, and an approximate 2.7% 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 for our proprietary and preferred branded products which was primarily due to recently acquired proprietary brands and added preferred brands. The increase in price was primarily related to list price increases.
Gross profit increased $11.7 million or 65.5% to $29.6 million compared to the second quarter of 2020, driven by the increase in net sales and an approximate 250 basis point improvement in gross margin to 22.1% compared to 19.6% in the second quarter of 2020. The year-over-year improvement in gross margin resulted primarily from a more favorable sales mix of proprietary and preferred brand products which typically carry a higher gross margin than our distributed branded products.
Selling, general and administrative (“SG&A”) expense was $27.3 million in the second quarter of 2021 compared to $12.8 million in the second quarter of 2020. The increase in SG&A expense was primarily related to acquisition and integration costs related to acquisitions completed in the quarter and subsequent to the quarter, but also included higher compensation costs, share-based compensation, and insurance costs as a result of the Company’s recent growth and public company status in 2021 (versus private company status for most of 2020). SG&A expense, excluding acquisition and integration-related costs, share-based compensation and depreciation/amortization expenses, improved to 10.8% of net sales from 12.1% of net sales in the prior year period as we experience the benefits of scale.
Net income attributable to common stockholders was $2.3 million or $0.05 per diluted share in the second quarter of 2021 compared to $1.9 million or $0.08(1) per diluted share in the second quarter of 2020. Pro Forma Adjusted Net Income(2) was $12.5 million or $0.30 per pro forma diluted share in the second quarter of 2021 compared to $4.0 million or $0.12 per pro forma diluted share in the second quarter of 2020.
Adjusted EBITDA(2) reached an all-time quarter high at $16.2 million, or 12.1% of net sales, for the second quarter of 2021 representing a more than two-fold dollar increase from $7.1 million, or 7.8% of net sales, in the second 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 acquisition-related expenses, share-based compensation and depreciation/amortization expenses.
Key Second Quarter 2021 Events
Acquisition of HEAVY 16
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.
Follow-on Offering of Common Stock
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.
Acquisition of House & Garden
On June 1, 2021, the Company completed the acquisition of House & Garden, Inc., Humboldt Wholesale, Inc., Allied Imports & Logistics, Inc., and South Coast Horticultural Supply, Inc. (collectively “House & Garden”), a Humboldt County, Calif.-based producer of quality nutrients under the House & Garden and Mad Farmer brands. House & Garden offers a strong product line of plant nutrients that is expected to strengthen the Company’s position in the nutrient sector and its expansive distribution network across nearly 40 states and 10 countries provides an opportunity for Hydrofarm to extend its global reach and market penetration.
Balance Sheet and Liquidity
As of June 30, 2021, the Company had cash of approximately $195.4 million and an aggregate principal amount of debt outstanding of $1.7 million, as well as $50.0 million of available borrowing capacity under its revolving credit facility. The Company received approximately $54.8 million in net proceeds from the investor warrant redemption completed on July 19, 2021. The Company utilized cash on hand, the net proceeds from the recent investor warrant redemption and a portion of the existing revolving credit facility to fund the acquisitions completed on July 1st and August 3rd for Aurora and Greenstar, respectively. The Company is currently evaluating its debt financing options to fuel continued growth and M&A.
Full Year 2021 Outlook
In light of the Company’s recent performance and acquisition activities, the Company is providing the following updated outlook for the full fiscal year 2021:
- Net sales growth between 45% and 50%.
- Adjusted EBITDA(4) of $55.0 million to $62.0 million, representing margin expansion to approximately 11.0% to 12.1% for the full fiscal year.
(4) 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 updated assumptions:
- Partial period contributions from the following acquisitions completed in Q2 and Q3:
- Heavy 16 – net sales and EBITDA contribution for May through December 2021
- House & Garden – net sales and EBITDA contribution for June through December 2021
- Aurora Innovations – net sales and EBITDA contribution for July through December 2021
- Greenstar – net sales and EBITDA contributions for August through December 2021
- Moderating organic growth in the second half (as indicated last quarter) augmented by acquisition growth from the completed transactions highlighted above.
- Capital expenditures of approximately $8.0 to $10.0 million (up from $4.0 to $5.0 million) to support expansion to recently acquired manufacturing operations in addition to distribution center expansions outlined in our previous May outlook; and
- An effective tax rate of 10% to 14% of pre-tax book income enabled by the utilization of tax credits and carryforwards.
Since the Company has recently completed four acquisitions (with only a partial year contribution from each acquisition embedded within the outlook above), the Company estimates that on a pro forma full year basis as if all four acquisitions had occurred on January 1, 2021, the Company would expect to generate between approximately $565 and $590 million of net sales and $80 and $90 million of Adjusted EBITDA(4).
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 second quarter of 2021 today at 4:30 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 201-389-0879. A replay will be available after the call until Thursday, August 19, 2021 and can be accessed by dialing 412-317-6671. The passcode is 13721342. The conference call will also be webcast live and archived on the corporate website at www.hydrofarm.com, under the “Investors” section.
