Hydrofarm Buys IGE, Lowers Guidance

Hydrofarm Holdings Group, Inc. (Nasdaq: HYFM) is buying Illinois-based Innovative Growers Equipment Inc. for approximately $58 million. The deal is expected to close in early November 2021. At the same time, Hydrofarm also released preliminary third-quarter results and gave guidance for the full year of 2021.

Third Quarter Earnings

Hydrofarm reported that its net sales will range between $121.0 million to $124.0 million for the three months ending September 30, 2020 versus last year’s $96.7 million. This is increase of approximately 27% was driven entirely by M&A growth. The net income is expected to range between $13.3 million and $18.3 million, versus last year’s net income of $2.7 million for the same time period. The adjusted EBITDA is estimated to be between $14.4 million to $16.4 million versus last year’s $7.4 million, an increase of approximately 108%. 

Bill Toler, Chairman and Chief Executive Officer of Hydrofarm said, “We believe a short-term oversupply has put downward pressure on cannabis growing activity predominantly in California and Canada. In addition, sales activity in highly-populated states such as New York, New Jersey, Virginia and Connecticut, which have passed new adult-use legislation within the past year, has not yet gained full momentum. We expect sales in these states to improve as they begin to more aggressively implement revenue-generating cannabis legislation as part of their respective state budgets. Despite the disruption, we continue to believe our long-term growth algorithm remains intact and that we are uniquely positioned to capitalize on the unprecedented expansion of Controlled Environment Agriculture. We remain convinced that we have only scratched the surface of the long-term opportunity in front of us.”

Outlook

Hydrofarm lowered its outlook from a range of $565 million to $590 million of net sales to approximately $470 million to $490 million. The original forecast of adjusted EBITDA of approximately $80 million to $90 million was reduced to adjusted EBITDA of $47 million to $53 million, or approximately 10% to 11% of net sales for the full fiscal year, up from approximately 6% in the prior year.

The company said that the expected increase in year-over-year adjusted EBITDA was due primarily to “(i) anticipated higher sales of proprietary brands which represented a higher proportion of total sales in the Q3 2021 period due to the company’s four completed acquisitions of proprietary branded product companies and (ii) anticipated higher gross profit and gross profit margin in the third quarter of 2021 primarily resulting from the aforementioned mix change to higher-margin proprietary brands. Those increases were partially offset by higher selling, general and administrative expenses as company further built-out its growth platform versus the same period in the prior year.”

Hyrdofarm said in a statement that since it recently completed four acquisitions with the closing of one additional acquisition pending in the fourth quarter, the company estimates that on a pro forma full-year basis as if all five acquisitions had occurred on January 1, 2021, the company would have expected to generate between approximately $580 million and $600 million of net sales and $85 and $95 million of Adjusted EBITDA.

ICE Acquisition

Hydrofarm said that the addition of the IGE commercial equipment product range complements its existing lineup of high-performance, proprietary branded products. 

“We are excited for IGE to officially join the Hydrofarm family,” said Toler. “With their manufacturing capabilities and strong line of customized CEA solutions for commercial growers, including benching and racking systems, made-in-America LED lighting solutions, and other equipment and services, IGE is a solid addition to our growing portfolio and will further solidify our position as the acquirer of choice in the CEA industry.”

Hydrofarm said it will fund the acquisition using a combination of cash, the company’s credit facilities, and approximately $11.6 million in HYFM common stock. 

“Our success in the indoor growing market is rooted in our premium quality products and high level of service to our customers,” said Chris Mayer, President and CEO of Innovative Growers Equipment Inc. “Hydrofarm is a longtime customer of ours and we have been selling Hydrofarm’s superior line of lighting products for many years. We admire their deep understanding of indoor growing and look forward to joining the Hydrofarm team.”

$125 Million Loan

Hydrofarm also announced that it has entered into a new $125 million senior secured term loan facility. The Term Loan bears interest at a rate of either LIBOR (with a 1.00% floor) plus 5.50%, or an alternate base rate (with a 2.00% floor) plus 4.50% and matures on October 25, 2028. Hydrofarm intends to use the net proceeds from the Term Loan to fund the cash portion of the IGE purchase price and for general corporate purposes, which may include, among other things, repaying any outstanding balance under the company’s existing revolving credit facility and funding future M&A opportunities. Should additional capital needs arise, Hydrofarm can, per the terms of the Term Loan agreement, seek to upsize the facility. JPMorgan Chase Bank, N.A. acted as sole lead arranger and bookrunner for the Term Loan.