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How indoor farming will impact the agriculture industry

Bill Toler, Hydrofarm Holdings Group chairman & CEO, joins Yahoo Finance to discuss the company’s growth and outlook on controlled environment agriculture.

Video Transcript

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JULIE HYMAN: Hydrofarm, it went public In December of last year, but it's a company that's been around for more than 40 years, and it just reported its first quarter as a public company. Sales up almost 63%. It makes hydroponics equipment. And increasingly, it's been selling that equipment to people who are farming marijuana. The CEO of the company is joining us right now. That is Bill Toler. Chairman and CEO, I should say. Bill, thank you so much for being here.

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You know, I just saw the headline earlier this morning that Virginia is the latest date that is going to push its date to legalize recreational marijuana forward. We know New York is going in that direction, New Jersey as well. All of this would seem to bode well for your business. How much is it tied to, I mean, you guys sell agricultural hydroponics equipment to anybody. But how tied are you at this point to the cannabis business specifically?

BILL TOLER: Today we're certainly linked to the cannabis business. But really it's about a controlled environment agricultural sector. It's all indoor growing. And so we think of it as, we have momentum going in our core business, which is our everyday established states all around the country, and we have a legislative agenda that's accelerating the business.

So we have good fundamental organic growth going on underneath. And then we have new states coming online, four states passed adult use back in November. As you mentioned, a couple more have added since then. And we feel like that sort of wave is going to continue as we go forward as really Americans say they want it legalized, governments need the tax revenue. It's all pointing towards continued growth in the sector and in the category.

BRIAN SOZZI: Bill, what type of product innovation are you cooking up, no pun intended, cooking up over there at a Hydrofarm, just given what you are, in fact, seeing with regulations on cannabis starting to lift?

BILL TOLER: Yeah, we work with both our internal product development team and also our external supply base, where we connect and develop products really around the world. Our latest innovation is really in the LED lighting arena, where we are launching our PhotoBio by Phantom. Phantom has been our leading lighting brand for the last 10 years. Bringing PhotoBio in, which is a third party tested and validated leading product in the industry, is something we're very excited about and have great momentum on.

We really just started selling it in earnest in the first quarter of this year, and our folks are out selling it. Customers love it. It's validated and tested to be one of the best products on the market. So that's a good example of innovation and how you can really, you know, the best way to grow is to innovate own your own brands, and it's wonderful to see that product starting to have traction in the marketplace.

MYLES UDLAND: You know, Bill, you guys called out some commodity cost pressures that you're expecting to run through over the next year. What specifically are you seeing? And kind of how is the global supply chain from your vantage point, what's the health of that, I guess, as we sit here as we enter April 2021?

BILL TOLER: Yeah, it's still struggling, quite frankly. I mean, coming out of Asia things are slow, things are expensive across the water. Transportation overall has been going up for quite a while, so that's been a bit of a challenge for us. We are pricing against many of those actions, so we're recovering those cost increases.

Overall though, we've got issues here locally as well. Some of our nutrient and grow media suppliers last year had such incredible years that they're having trouble keeping up with the growth in the category. So they, the supply chain while improving over sort of its weakest positions in COVID last year, is still not back 100% where I'd like to be. So we're still leaving growth on the table, because the supply chain isn't really fully back 100%.

JULIE HYMAN: At the same time, Bill this is an industry that is, as you see demand out there, this is an industry that's still pretty fragmented. So as you guys go through this year and into the coming years as a public company, do you expect to be making more acquisitions or making acquisitions and doing some consolidation?

BILL TOLER: That's certainly our goal. We believe that the fragmentation in the industry is a great opportunity for us. We're a 40 plus year old company. We grew up in this industry. I'm fairly new to the business, but really, my leadership team has been around it for many, many decades. And I think that's the exciting part, is that we know the industry, we know these small brand leaders that want to be a part of a bigger platform like Hydrofarm.

We're talking to a number of them now in hopes that they'll want to become part of our company, become part of the growth in this industry going forward. So we very much hope that M&A will be a part of our future and we're working hard to make it true.

JULIE HYMAN: And you know, Bill, this conversation began with marijuana, but we've been showing all this lovely footage of indoor farming of vegetables that one can eat. And we've also seen an increase in entrants on the market of companies that do just that, vertical farming, indoor farming, especially given the pace of climate change. How big a factor do you think that's going to be? How much do you think that's going to change agriculture say in the next decade?

BILL TOLER: I think it's the single biggest thing in front of us. I mean, obviously, right now, a lot of the excitement around our company and our category and our industry is driven by the cannabis legalization. But only a certain percentage of the population will ever interact with cannabis. The reality is, everybody is going to eat and everybody is going to need a more innovative and better way to have farming, better way to protect the environment, better way to use water and land.

So we believe that controlled environment agriculture not only affects obviously cannabis today, but is going to affect you know vegetables and perhaps fruits and other things as we go forward. And we think that there are lots of money and innovation and technology going into that space right now, as you mentioned.

And we think through that, they'll find the right models that really execute a profitable way to grow, really to grow all things around the world. And there are a number of models now that we are partnering with and working with, and we believe that the controlled environment agriculture for food is going to be a great part of our longer term future.

JULIE HYMAN: Well, let's stay in touch as we watch the development of it. Bill Toler is Chairman and CEO of Hydrofarm. Thanks so much, Bill, appreciate it.

BILL TOLER: Thank you, nice to be with you.