HYFM - Earnings call transcript Q2 2022 | Hydrofarm Holdings Group, Inc.

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Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Hydrofarm Holdings Group's took Second Quarter 2022 Earnings Conference Call. At this time all participants have been placed in a listen only mode, and the lines will be open for your questions following the presentation. Please note that this conference is being recorded today, August 9, 2022. I want to turn the call over to Mr. at begin. Director Managing Taylor, ICR to Fitzhugh

Fitzhugh Taylor

Officer. www.hydrofarm.com. Thank call market These Hydrofarm’s Chairman today at Good our the afternoon. Second Chief and access on Earnings documents should on X-K the With me Section issued Financial Company's website are is the and Executive Quarter John available you, now to close. of Officer; everyone have Anthony. Chief Lindeman, By Release, Bill Form XXXX Toler, Investor Hydrofarm’s after today

Before cause formal forward our condition. materially could our statements. impact and not our statements not of that to we numerous today These discussion our also These for future refer them. should SEC of are all are risks operating that uncertainties begin actual current put subject financial to We note detailed results please risks remarks, from on undue our statements will recent more performance, can future looking you include filings you that guarantees differ expectations. reliance therefore the results forward-looking discussion, and and to

we in Bill? GAAP in like prepared to Toler. the today's a performance. this with will measures The information of non-GAAP results turn be we believe measures, earnings call, Bill as can evaluating be presentation accordance to With comparable during reconciliations Lastly, I'd that, for additional over not should are our isolation, which GAAP or our useful come considered for and release. available in in call to discuss substitute

William Toler

Fitzhugh, afternoon, Thank and good you, everyone.

of Recession our in impact we in results our of last were and Canada. quarter, signs continued the Initially, stabilizing. feel trends QX, second in encouraged in our US, release quarter As announced by displayed sales early press the we the as results Hydrofarm’s Industry the to week,

originally expected the will Once More we products, remainder our spring sales assumed weakened through our the so but the and expected And did in improvement summer to the trends seasonal third continue the the always continuing get the lower there. year. for with its now get quarter to XXXX. for from for for the expectations a entire business the shifts of quarter. impacting trends off QX, current not normally plan months, lower took will QX our building base results these QX That we build we have a have again less that mix we volume specifically, and out a volumes, as progress, didn't year. the in our QX, profitable and volume improvement However,

lasted While data, remain us. opportunities is grow, at will to through the longer the for our dispensaries, of headset in confident This pricing demand relationships. for. term This which positioned expansion balance should and the and not and in Multi occurs, the US are industry consumption with as prices. back looking Furthermore, in growing has lower should recession give the people manufacturing of And our the has many distribution in a Operators customer State strength unique Hydrofarm that are rebound, we category MSOs, signals footprint. brands in course When invite to our growers changed. continues they strengthen. cannabis measurement of Canada, According the volume we albeit sold best than and units and sold the supply ahead to expected, long and ultimately well

in of own proudly our a also And we top distributed over we the many of drove our As brands. sales brands. reminder, XX% represent industry's

we our even industry. brand to nutrient provides is Emerald our last new month, currently believe will strengthen Just leading Harvest, weakness insulation of sales, the about in a preferred further This addition against which us added our consumables lineup. more we which portfolio, XX%

share. competitive important Now of position is our market measure relative Hydrofarm’s another

public reporting that other are disappointing while share. we declines building market are sales Our entities than seen suggesting by less decline a

During are and this to right in strengthening deleveraging core our maintain focus order efforts assets, sizing time, while business. we've of difficult necessary our continued our the on to long-term health

net employee in measures, million as during cutting and take further to our our across and basis, we've freight our second took annualized select efficiencies acquisitions. XX%. price from to capture the maintain working and XXXX more tighten steps cost about inventory where conditions the lower management, at million continued belts reduced about increases, capital optimization, synergies by base taken our detail. during the reduced shifts quarter We've to And strategic headcount lowered business our net or their team's we quarter, liquidity cost expense to talk More we of business plants debt $XX steps cash which we further fact, structure, all, headcount year, expenses finally, position, In estimate an our Eating positive the continue we've in surcharges, we in this quarter the a we'll streamline cost on by to increase efficiency board. about position did reduced we protect will reduced and second through increase cut solid been dictate. also find our the John to and increased outside further end effort and $XX first specifically, since levels. our the our enacted All we've services, including last as continue

from ahead, expectations believe look year can we back build As and have appropriately reset we here. full successfully we the

stronger, who a the opportunities. XXXX and further full eventually of second to quarter John, to and me and and take turn leave taking Additionally, industry our to will let With growth provide we the rates financial of of better discuss confident that, will return growth the over on results optimize as leaner our details outlook. result, updated the it to John? future organization comments advantage will historical refine actions positioned we're remain us and year

John Lindeman

in $XXX.X period. prior Thanks, to Bill. And for $XX.X afternoon, the year sales million good the everyone. were million Net quarter compared second

We of our M&A second higher sales year costs. prior the price this Our did in But decline to the as a X.X% to volume. benefit XXXX XXXX XX.X% XX.X% to added realize by offset through we than acquisitions was top quarter pass more relative in in quarter benefit continue period. the line mixed organic a

But US was the to in quarter in While yet second of encouraging March trends states sales April, overall year-over-year We states. continued the in saw to the did these offset date the dynamic growing in period. demand growth tailed into of enough US results in half experience these and off sizable to continued not markets. quarter Furthermore, sluggish oversupply we trends and sales select remainder key QX. many the the have third

decrease our shift preferred relative notable QX benefit received On the branded underperformance which quarter. should basis, mix that proprietary total as $X.X much quarter were XX, partial Heavy in sequential due for a and sales mix experienced a quarter, distributed profit prior in of House we from the relative the in sales of only brands. of same believe largely on our media, was in sales is to or our select lighting, We a that to brands, higher impact quarter decreased year-over-year sales Garden brands in by the gross namely $XX.X by a a several the Gross a increase we net and note proprietary mainly also which comparability. distributed basis largely recorded million acquisitions, second proprietary acquired Similar benefit all end our largely sales from in the performance composed press to our I of represented QX in second was last excludes quarter, QX, in at XXXX. ‘XX the sales the reserves brands full certain includes items adjusted period. during gross net benefit relative of The to to & Profit million of XX.X% outpaced of the negative year profit did which QX. $XX.X categories, for and our million positive in outperformance us, related change to We adjusted brands in QX. sales and million which release select the profit, of year ago inventory calculation impact this the $X.X $XX.X preferred sales a or down in of basis, this million they we than in proprietary relative gross of to This mix relates the relative year. is compared we of adjusted experienced period. products to last primarily grow is in caused On brands product X.X% proportion year-over-year included the the

the driven last proportionately second margin the XX.X% the disclosed, or last ago period. to SG&A quarter the and in expenses This lower certain $XX.X expenses. as primarily the was were which expenses difference altered to by just primarily and XX.X% expense reserve, was mix. and which quarter in adjusted to comparability decreased to an in impacting SG&A insurance million million compensation as by $X.X impacted costs of would an will or was million acquisition million decrease year. expenses. due costs, $XX $XX.X total other margin $XX labor lower increase costs, ‘XX was This this Adjusted The have much year Selling, Excluding well the in volume sales inventory million, in freight year. gross facility due than compared be versus in than increase higher XX.X% acquisition in net General sales Administrative higher related decrease items it related profit been sales and

sales costs reminder, pursue lines, our center has we Along structure size emanate productivity of overall And down million from SG&A $XX.X future in come XX% initiatives the reduction first estimate in five quarters, on on our and which sizing visible achieved. will is This headcount has positions completed as expense, growth, for our most mitigating that quarter savings adjusted these top an conducted As diligently $XX.X to well acquisitions this approximately demand by the we QX. and approximately the reductions and we've fiscal from year, today. cost scope added cost during X of primarily in right last XX%. reduced costs impact term expansions, these headcount that remain the these our a reduced near our additional come headcount over last distribution we cost already annualized million our for we the of in in operations. our basis. and in which increased form then by while those primarily and the our And The $XX diligent we we see which million nearly mostly of reductions

estimating adjusted SG&A X quarters. are to million next currently $XX million the for We $XX in

declining August a market goodwill company's of As the Xnd in from on impact prior its acquisitions. within valuation our the valuation and press release, evaluation industry trends noted triggered the full arising

included an quarter the approximately $XXX.X recorded quarter second loss the was well impacted net our heavily Reported impairment of for As the inventory $XX.X write-down as goodwill as result, the a quarter. of million. by in million impairment

million for $X.X year. loss share the diluted As reported million in net share second to $X.XX result, compared $X.XX million diluted income quarter per net loss share share or was net diluted $X.XX period. was last $XXX.X or of $X.XX in Adjusted net the per per the quarter adjusted a income $X.X to of or compared million or per $XX.X ago year diluted

inventory well The as its EBITDA as decline a on adjusted $X.X year not cost for driven the sales million adjusted which second was our EBITDA reserve profit period. net impact of we EBITDA prior in and in the decreased in to million quarter calculation. the Lastly, in $XX.X in our by million loss did a primarily structure $XX.X the from adjust current decrease

and position. the to liquidity sheet overall on Moving balance

cash, gives XX, I and cash We equivalents XX, credit the million At cash quarter, composed the drawn of on sold revolving equivalents 'XX, managing debt on using We inventory amount capital the approximately contingent capacity end through of cash quarter as second million specifically, liquidity of made We progress credit payments at investments composed million and principal approximately of our should As company's subsequently million necessary borrowing million our through by note in and significant million estimate we thereby paid agreement. actions, more $XX reduced month the of net of inventory $XX even our in an of these working restricted under end revolving while making the also on Together and our had position. plus we had We million. cash earn-out quarter. in to position. capital available the which second capital which inventory And have in outstanding increase we approximately of our that also of last strong in flow, had manage June hand. our $XX.X helped the $XXX.X down cash aid end that opportunity cash further as free and cash aggregate of further position. approximately the the we X XXXX Aurora believe liquidity the levels, in period significant of in facility. investment was $XX.X the generated us we $XX total us an out working the turn June quarter, and still acquisition, $XX.X net which of

now we context the will I in moment, will half this challenge. it so question is free figured our know can a XXXX that, second in However, year liquidity of will outlook, many now. forecast, to regarding position be for given which our highlight will prudent be me the But let outlook. know a duration we strong of a and driving XXXX the cash to we feel of that year. the current a full that we our we that flow suggest cover and maintain highlight let With in further ask updated me and best I feel XXXX clear all

company through the July months for reduction approximately sales assumes which expect similar experienced account late over the some of total to quarter in $XXX levels net million, further the those continue sales $XXX from remaining quarter. second to fourth shortened We holiday million to months year with of

And we an weather to reserves it's the opportunities growth loss in steps industry This $XX and to current to we on between includes inventory concludes ability our about the remain necessary expect adjusted our while of full also This We the year-to-date. long-term the place $XX million $XX.X we industry. prepared In EBITDA optimistic closing, range business our capitalize CEA our headwinds. believe lower for expectation million. taken remarks. year, million fundamentals prudent to the of in put

the please are questions open Operator, answer you happy now for lines any to We might questions. have.

Operator

Instructions]. [Operator

question first Our come from Carter Andrew will with Stifel.

William Carter

is commentary kind liquidity year, of us you to -- question of kind the ask of I the appreciate the remainder of use ability have for First the the can But kind term and of incremental kind left? capacity savings. remind cost want I the your around what your the kind incremental of to are parameters debt you of

John Lindeman

Certainly. Andrew. Thanks,

Let ABL me facility. start with the

I the the And So facility, million end we quarter we really roughly had you only as against with a million JPMorgan availability Chase. have as drawn million we noted $XXX in of $XX that one think, that X time. know, so credit fixed-charge at as at in and $XX availability note available, and the that the quarter, financial facility available facility, of We it into on $XX a excess to us. the drawn of that less facility it's covenant of noted, than on million. the when and I is play X at million our ratio particular And $XX not quarter coverage near spring this end comes have only

bit that borrowed in We currently. less financial meaningful could additional this it on terms. covenant-light a using little structure that A was On has have million and that ratio. covenant number no so than put And the $XXX see did XX-Q we actually there. facility, term debt details round the you matter, actually,

William Carter

that's helpful. of terms get the wanted operating I guess, helpful in That's to out Yes, second to way. environment. ask question of that the I

left of indicator ahead I that your where that there's for ask -- be release had still Just would of ahead of out some out cost? pricing. you there You kind deflation, one X% this from category. if you there's I lighting the question pricing cost I pricing rationality in kind would looking any of that you stated one guess, quarter. the stripped And believe said for is

William Toler

through is way, brands. right. the we come or the brands of other increases you're material our right? increases the that's price Lighting taking are anything either But and one us all the kind or from direct our that's brand to on distributor categories, through going our that packaging other come raw Yes, has own

We are that passing on. of all

way far, exception, of through sodium working and high-pressure competition taking things. and okay. out we're on Again, And pretty the kind the us. yes, pricing excited it's lighting the the that's so which the exaggerated But has still been -- rational. been haven't it's coming is too going other other And being elasticities to

Operator

question next Our come JPMorgan. Teixeira with Andrea from will

next on move to will the We question.

Blair. from will Our David Shakno next question come with William

David Shakno

This for Two is Shakno Andersen. Jon in stepping David for questions you.

$XX for first, The Did to just million, to the quarters? expect $XX remarks. you million million $XX wanted I each? clarify adjusted the X from SG&A say prepared in you million $XX next

William Toler

Correct.

David Shakno

Great. second then you require are what And in Okay. And do else? process? feel somewhere right the consolidation Is now? most Michigan states do where that the Oklahoma, still think or it they thing, you

William Toler

Yes.

kind out. Oklahoma stands think of I

if population literally for of has there's rough think million U.S., commercial which half in them, is numbers, licenses the X overbuilt I XX,XXX state. and a bit a Oklahoma

one So and roll-up seeing strategy, not, it's some pain. severe issues as going going some California, sea that the honestly, consolidation we're I I one although think as if longer the think Michigan seeing level that what normalized is still you're is next sooner to the most here, But level. we Oklahoma. term, the hopefully, to specifically you of overbuilt, be going you kind we're the But it. its get will, on see its through over it's your kind California in not had it find to and will. will than needs But yes, demand to most work that, we haven't to in supplying to the consumption call most of quarters. back so yet hope but one if question, the couple it that's Oklahoma of

Operator

Instructions]. [Operator

Our Bill Truist Chappell from will come with next question Securities.

Stephen Lengel

newer the to or step-up should in or we markets Bill Lengel we expect where This as through Chappell. year? through 'XX? through of growth the on sort move meaningful move And -- are is progressing the How Stephen for

William Toler

you. from XX states showed kind XX got hear and those a as lot would of you expect. growth, I -- We've to good out think Midwest of Stephen, of East,

Montana, not Florida those like pretty Louisiana, in has good smaller market. places Montana, the Some obviously, ones, of Mississippi, actually been East. But a

dispensary the level lot hydroponic and had as New had at Jersey has has growth a some growth of well.

So states -- a I traction passed before these XXXX even starting that. you're them of in some finally see in of to remember bit many them, and that of little

momentum as you're starting little little Virginia a get to a bit has shown So well. there.

triumvirate to Michigan, California, by you that decline So traction. the It's wave just will. newer be Any so ones. new that these just coming relative is East, there Oregon can't you But large is if X-state the Colorado, Oklahoma, area simply states. these or are offset seeing

We that to we are it's watch as seeing to think and to be forward. we traction, going go continue fun

Operator

question-and-answer session. turn Bill conference for our I closing like concludes the This would over to any remarks. to back Toler

William Toler

you, and Hydrofarm operator, Great. forward care. to following Take greater in your you soon. look And Thank you. today. interest with all speaking Thank we I in detail appreciate

Operator

Thank for presentation. concluded. The today's attending you conference now has

You may now disconnect.

Hydrofarm (HYFM) 10 Aug 222022 Q2 Earnings call transcript