Earnings call transcript Q4 2022

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Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hydrofarm Holdings Group's Fourth Quarter and Fiscal Year 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, March 9, 2023.

I would now like to turn the conference call over to Anna Kate Heller at ICR to begin. ahead. go Please

Anna Kate Heller

now, www.hydrofarm.com. good X-K is and Web Investors Officer; at me the These earnings available Officer. on John our are access Thank quarter documents today fourth Toler, afternoon. of after Hydrofarm's section site today XXXX By Financial Chief Bill the and Executive the should Chairman call Hydrofarm's have Lindeman, to Form you, release company's With everyone issued and on and close. Chief market

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

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

to like Bill With the over Toler. that, I'd to call turn

Bill Toler

for the for Kate the sales industry year. to Hydroform end Anna encouraged year and everyone. However, was our for finished provided last our and that previously upper you, Thank result for afternoon, at we outlook of report challenging a net XXXX a good as year I'm

free QX, positive third cash positive quarter marking generated of the in also We cash generation. consecutive flow

many of made nutrient brands We've our supply US team In Canada manufacturing me of begun eliminating distribution that SKUs, decisions product about I'm more a space rightsize by the than some the our XX% in most to we XX% SKUs. took is the year XX our subletting consolidated the representing here over and future. QX, these and metrics, and and our leave last actions we also begun encouraged optimistic really X,XXX manufacturing by While it our in about facility in centers. chain footprint we've and closing our brands our portfolio,

non-cannabis XX%, food In have a our result than begun addition, expand garden. we and headcount integrating CEA working We've have into further and more of and our the primarily including we by lawn floral aggressively also to total channels, reduced acquired. reduced and companies capital efforts sales as

As you elaborate see which in a some more today's actions part set of later. a initiative, Collectively, will of more and more diverse business. profitable in nimble, these to importantly, start were and on leaner, these restructuring earnings us up release, actions be QX John

And also see a perspective, brighter so have on 'XX. industry some of our ahead, of We're we February I from from looking days 'XX metrics. sales experienced several see signals ahead many average through November starting fronts. in sales daily positive to From stabilization

to in of standpoint, reason continued to give the in a demand of particular, stabilizing US recent hydroponic inventory Headset And data, to to by us several inventory dispensary is profit took to has many cannabis see sales, a these the in the fruition. we markets, XXXX. that according in From a encouraged of see return cannabis come dispensary level view our average complete we we many are the XXXX while and volumes, been the We 'XX some US to to a 'XX. In prices positive captures second points in unit benefits US expect stabilization. cannabis believe trends measured source growth sales margin data half grow. reflect single expect of actions in signals or of no cannabis Although, industry, below data have

efficient increased focused we sales more mix, spin trade Specifically and improved productivity this and across expect year, and distribution our centers. manufacturing

will EBITDA our margin. EBITDA of adjusted in and help drive our improvement adjusted All which and

we to remind like a begin our all bullish of for new term category for the stakeholders fiscal year, long of on as and Finally, Hydrofarm. prospects I'd my our view

use a Our should the consumption company of from of patterns. The still adult the is reduced to large just despite reliable access annual of largest to the long the has brief stigma history consumer medical in and compound that beginning still cannabis, a higher double economy the periods that legalized US, some more experience that drive population products fact improved softness. come and growth remains regulations, in and digit branded revenue trackable world, quality portion and

industry remains on our incredible future focused our position executing margins the team strategy, for this resilient Given company growth. dynamic, and and higher

proven view a market our that discuss to For to industry. continue positioned actions fourth we details it for of the and in are our in John open my in these reasons, financials be investment I'll purchases XXXX. XXXX several I've outlook My Hydrofarm. him made leader hydroponic let With further to that, personal to my provide turn support John? over increase quarter

John Lindeman

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

effort more period, our of prior was by benefit organic year X.X% the team prior quarters, in top X.X% XXXX our but XXXX sales prior to mix M&A We our from by sales similar to offset have the decline as line quarter price acquisitions which an have mix would in Without strong relative on our impact sell-through realized quarter, positive fourth to driven XX% in than was sales this been Also, continued estimate to noted that decline the volume. the recession Our industry price added in quarters. discounted to we the lighting mix. impact products. a that QX factor,

by proprietary the trends sales the did lighting diluted sales some was sell-through over the to in margin percentage branded total contribution We in see brand discounted quarter. as increased a proprietary our proprietary of brands positive While category XX% of of products. QX,

of and Michigan Colorado, Maine. level in sales states, improved QX in the QX mature including First, Oregon, declines more Washington, from year-over-year several Oklahoma,

to advance Second, on our sales commercial relative basis. a continue

year For our approximately year. prior sales commercial the of approximately versus the in XX% represented sales XXXX, XX% total full

I take to a now initiative. will restructuring our minute discuss

included help from eliminating heard instituted initiative product Canadian office we restructuring we facility and facility, future consolidating portfolio, China Bill, As manufacturing to our our that transportation consolidating and terminating our contracts nutrient costs. reduce

million these we in of pre-tax approximately result $X.X actions, of a are QX, charges noncash. As million of approximately which $X.X recorded

profit that in $X.X related approximately loss half to We $XX.X annualized continue adjusted to million gross quarter We inventory $X.X XX.X% the reserve The proportionately the also freight and restructuring was approximately in first of Adjusted million expect of costs savings sales XXXX to execute efficiencies $X million to our or as is quarter and adjust. margin year which higher decrease charges, charges of compared in did and labor we restructuring of and in net in in plan. XX.X% gross believe million the not result incur profit and for $XX.X primarily on additional we will cost due million compared fourth last fourth actions an in or to gross the $X $X.X million basis. sales largely profit of was Gross year. million related of the period. ago net our

ago adjusted XXXX costs, took partially million and professional $XX.X in facility fourth in $X.X a costs, $XX.X costs in quarter was expense Adjusted I period. year outside and in compared SG&A expense. expense decrease was negatively insurance to million and administrative in in general due offset and we note year. the was quarter primarily million the reserves service the $XX.X million decline that the and impacted million accounts of versus compensation SG&A last also in period. receivable during that QX was Selling charges $XX.X employee to increase an by related by should The

inventory quarter loss of million EBITDA a by The which margin million not $X.X Finally, prior charges, our we million well accounts $X.X was the sales, receivable calculation. from in EBITDA fourth adjusted adjusted a lower primarily did as decreased gross decrease reserves period. adjust as in adjusted lower profit in related $X.X for year in net profit again driven and in EBITDA the to and

balance overall our to sheet and on liquidity position. Moving

$XX draw improved to was third quarter. nearly principal on $XXX.X ended with the million, million We capacity total the an agreement. the XXXX. majority flow the free mature cash year our outstanding we of plus of does accumulated available for company's We year the estimate for of up in $XX.X approximately million December of cash revolving vast XXst, have million from December approximately the positive as in aggregate the balance XXst which $X And of credit under million cash Our as not as flow of $XX free million facility. zero and QX our liquidity of of We XXXX. amount entirety total revolving comprised $XX.X position XXXX, of credit debt cash generated borrowing until approximately case full

our XXXX me that, turn let With year outlook. full now to

the We expect to range year. of for sales full net $XXX million in $XXX million the

the which lift we resuming four comparison last have in expect half modest in in years, we Our estimate which spring in will of seen growth XXXX. five second of seasonal a months, we and in we’ll assumes in the result expect be to summer lift the the

further preferred brands, We which heels initiatives restructuring and SKUs of are distributed the see our a percentage that product in proprietary increase our in we of the brands and the will on categories, reduced modeling we in largely sold.

resume To we on year, range, adjusted expect in which margins minimal from price top in gross to to course mix expect mix, and that We continued realize will from in products, the of approach sales return there, productivity energize XXXX. the the to reserves. profit further our help but across sell primarily for our expected more sales into to favorable savings levels XXXX of improvement to sales a positive pricing within the expect some lower get effect inventory through increase improvements QX feel contributing in do us the mix levels. We continued and remainder benefit cost of put the see of margins then of to productivity need XXXX, lighting increases impact should negative price discounted

profit We us. adjusted assumes in adjusted SG&A the EBITDA full positive in the that year reserves reduction is that accounts behind are expectation modestly for This largely some and and expect margin, significant a inventory adjusted gross receivable XXXX. improvement

full generate flow the expect positive for We free of XXXX. to year cash

generate nature down our cash flow in expect cash to clear, the cash of flows. for will and primarily our free QX, I flow. free positive year we do We sales total not generate XXXX because do we flow But that XXXX. expect note be cash our free expect just working full seasonal reduce that should continue of capital positive we levels, the from positive with to to

earnings XXXX today's business open they full And to let the I beyond. our in to all and in We assumptions may operator profitability for in year conjunction In at we line in outlook. any encourage them release our you with and for improved you team XXXX have thank for a to me questions our position laid out did few to ask with other review better Hydrofarm have. that, closing, the want

Operator

[Operator from Instructions] Stifel. Andrew And Carter from your question first comes

Andrew Carter

negative kind the Mentioning that that's the pricing in quarter. lighting actions of you took

First more quarter I us up, the And at you that. to Number things impact to $XX margin? was maintain lighting cash down fourth first a confusing of do and have the understand that the I still it and you in more can inventory, your adjusted you million look might the draw flow. healthy and of I how what's kind in down benefit much if Was what’s moving in tell product of business? or the not. be go if could you the draw inventory of think products so majority quarter two,

John Lindeman

And I were sales, XX% there lightning to lighting we a in through indicated, have job discounted brand our is lighting sodium good definitely some products chunk those, our again, team do sales high We perspective. when although, you think as we're sell some you very roughly some of our the dominantly our margin QX in pressure that our And that lights that compression, or were XX% was about phantom is through about QX. proprietary predominantly of QX. in of give we sold think selling it do a total inventory more selling did the good branded.

work we'll of remainder it QX. through expect We in that the

Bill Toler

the So sell [Multiple all through. we've we full amount, expected Speakers] taken stuff

Andrew Carter

restructuring this standpoint? utilization you can kind you now us that volume, where then is from were where on Any question of initiative of you've done that year And kind step volumes there of you're your ideas, is anything give more your you're that second sense this debt take of network in or front? if XX% back just if to we and of give could in And down out you kind into 'XX. a another any us manufacturing have is you

Bill Toler

them bought we and there. we then As the have probably that but most And to And you levers four XX% well it XX% in still of in up want pull. place know, some facility where do maybe have to you to the nutrient sort low-XXs have moves more Canadian XXs go overlap. that's brought we businesses and the to when the by utilizations the we had of closing range volume have that, the declined, we room don't to any we certainly in to

have don't we have developing now perhaps kind different today. located of Coast. in of Eastern site, the the we on Midwest are All the maybe a options facilities where West production some have also We

to well. But need we option find out be certainly further some to moving footprint. pull Midwest of get levers East So or have further to as that optimization an the that cost we more the could if we or

Operator

comes Andrea from JPMorgan. next from Your Teixeira question

Andrea Teixeira

to of Just commentary. things, I want back A wanted to clarify. to go the couple

financial gross levels. that Then I In needs I what is other of and then you that any and million sure XXXX or pieces terms mentioned you of you revolver mentioned $XX put may know, think you the your we clarification in capacity in approaching feel comfortable, there that to just anything terms expect, the on John, terms debt missing but moving are liquidity, in not margin of you make the now.

math the of the So doing lower just with level revenues.

free EBITDA flow. back just can saying that positive adjusted cash kind out we you’re think I positive, is then of and the

results sure should of EBITDA Just progression we wanted a dollar the of the thinking and approaching be we how how we quarters? have should thinking from be have the restructuring, when say cadence how perspective? that perspective I moving more gross a towards of make we to end pieces the in when Because pieces and be moving we should these that thinking margin all the is year the of the of from

John Lindeman

Let take I those Andrea. me in if can, to try order,

the the million mentioned $XX of I So cash the that's year, line. million balance we $XX yes, on plus liquidity, $XX at available think roughly the sheet of and liquidity on plus end million

come number mentioned. our Again, is about million position $XXX X% only know debt million. for our roughly the doesn't bulk term in and continue until due $X.X roughly of roughly to we that the the amortizes about portion facility, good -- year, You of is $XXX really feel held our liquidity million a our reasons. come of amortizes principal we debt which That that XXXX doesn't due debt a

a from liquidity continue So feel we to standpoint, good.

year. that row, to coming for now in given continue had, our us been to once 'XX we've -- pull the cash down you continue success and generating good full this capital take call it we and positive our free in like gives having to the that have we've us. we of quarters have investment As QX, we capital. in that And down this able cash expect category again, three working feel our terms opportunity way the brief we continue working to success demand outlook with to down noted, doing reduce been been good capital, as in into short our that expect a 'XX, to in XXXX. we've flow year do for working period, in to levels that's We've that our and versus generate for in about feel prospects the QX shrunk that done and the to to The we've is continue which through

terms of will. In margin rather attack you call the of sort sort me modest it of or this the EBITDA, if let way,

So outlook, reserves added XXXX, us for which And our our say was adjusted profit XXXX. inventory gross you we XX%. minimal in margin as reported assumes earlier, heard

we in expense on to that an kind margin that would profit want that did XXXX we add not it adjusted might you estimate -- price pricing gross back. million effect So the the inventory like $XX.X pricing expectation XX% put get in of a proprietary consider level. of that improvement of with On we'll more and benefit And a basis, XXXX that for percentage top from a sales, from in of reserve mix fixed us. drive lap effective trade brand that which a spend improvement, into that have will higher contribution

is associated the consolidation, our restructuring expectation manufacturing nutrient our manufacturing We which business, it in effort. part have is with of productivity

centers. to of the opportunity all SKU to add distribution margin When expectation of actions you those basis our against that continues our another inventories an of we relatively for daily in value following rationalization levels it have higher think We activity restructuring up, We're the points part if our was optimizing XXX productivity offer those exist things us… effort. that XXX of

Andrea Teixeira

would just be you in basis term that's offer So XXX to points long opportunity you that going to already or a to realized this XXXX goal? XXX think

John Lindeman

level No get the an that sales opportunity the there over we think on outlook have we we range, call course to of that within XXXX.

Andrea Teixeira

in So would like roughly, XX% that about the so level which to that you it's XX%, mean is XXXX. that had XX.X%-ish,

So quarter. you at in some say, sure quarter, so let's fourth called would you quarter, that just or make tough out that as that pricing the -- obviously point, that third will be to first think be

the So going of fair? level ramp Is you I'm year, to that are full that to not for assuming but course.

John Lindeman

correct… That's

Andrea Teixeira

through. are inventory to I inventory, done the in needs concessions, have in first still but terms quarter then the of the some you you guess, pricing like And that work mostly mentioned that adjustments

be of be part million, in terms like line, the that what decline of have in be would you $XXX is million from and carryover? thinking volume do volume sales how should midpoint pricing? coming $XXX sure much the than we like be decline of XX% more that, would the should thinking but I how top volume be -- greater guide that of how mix we -- the still pricing the from your would what within much actually guess coming how total in would or I'm be and carryover So down, pricing, than

John Lindeman

through of that for low expecting we are the we did like again, And of lighting the in positive have some high reason will But are risk remaining for remainder sell impact continue negative portion estimating single we we So the digit much we here of QX. to in that same price/mix products. the our pricing sort QX year.

And of so you it I span the residual be single and the the that volume. as digit look year, think at sort just of across low the a when full very for year, will positive pricing of the then full think

Operator

comes next William John question Blair. Anderson Your from from

John Anderson

from of perhaps recovery then I the about are wanted see thinking that not from and here seasonal we terms coupled input in not second only that the stabilization some not in this of of way half? sales. kind at kind heard that commentary, of I'm in growth getting in others confidence of growth similar 'XX, degree customers of others in about what but the you the back gauge stabilization just in around half of with level kind to and sure, and daily of you wondering your enough duration kind point other just commentary of the seen channel kind ask can you've And And if industry. but from in this the I've average I'm

Bill Toler

the and I it down say all were that, November, think through trending October, December, February. then show did was a to industry we it's improvement, flatten begin fair sequentially really trending, January, the and little way to

months the inventory that's say, and So you said sort when all adjust have tone and people along into good. that's there -- took that the we the the customers, that, are time, can confidence think saying, probably that's more it here. that, let's being seeing a that of, people it's of say, way a of are pricing, back think speaking mood we with a take year, John, the we all us seasonally to the find the ride, others XX difficult Headset, right, are getting think in been are you I really encouraging. bouncing in factors, coming business off. we it. probably and the And to about And been from we the whole the think levels bottom stabilization, you've it's us the other thing is is reasonable bottom, to kind things is kind been But But and that gives

right how X.XX, we're our cautious we'd which So to that you're how half half part pretty be, much from we is and of the to years up but why for back we where anywhere much we're we to X.XX be 'XX. now. against performing the still believe it's close back of projection of think not how predicting. industry call the of reflective And very That's soft about course, comps to that like is,

So that hopefully, you're midpoint show get of growth past. the able for XXX hopefully that off and to year to go and

John Anderson

You product that doing. mentioned work the you're portfolio

XX different the brands, -- at you exiting it non-proprietary do is there perhaps mentioned industry industry? of the kind you entering the over of where a are of largely that that And look is did in think thousand and mix, business think than rationalized. what your of terms part as think to do position does the the kind how categories that in you and that do? maybe versus more business complete across about work, restructuring this SKUs Where point, the work recession industry this you I thinking, recover, your mix does even proprietary I'm says perhaps

Bill Toler

first in XX proprietary. or two would years still should No, or get it proprietary we're representing can't now we to that almost brands I carrying and need business be with and of business, thirds years our will have branded represent it and two hope the and should to industry expand and to two last mean, your question, exit proud we a support from should and year, maybe I We doesn't XX, continue right? deeper think year, strong were be phase back XXX get this three three brands. But I we XX, XXX very in some of simplified partners that. this that think I

there away to some think are are naturally, But people representing [Technical find other them. some away you're I to seeing shakeout smaller Difficulty] should to represent and So from going them, going will in businesses, be the to bigger natural some hopefully go of go that it powerful own on distributors operation, who simpler, also of come brands focused helped more less SKUs, proprietary. less SKUs, and higher fewer out which penetration we brands, complexity, has a were cleaner on with some a

to to of have depth to the able have the we proprietary broadly distribute brands the We industry be do. to the support infrastructure to way

you So kind proprietary have everybody of will. healthy to if for that's that penetration, important

of over work you'll or think and bottom the always that the year of So pretty brands, and rationalization think And whack forward. I so. we've every you was we good This our done the a now some been SKUs doing I I on year portfolio business, a [price] is SKUs We've pruning took a and But quite for big the change. XX% as less XX simpler there. XX% do big should the I think is certainly this of brands going see years, of every half more think three that less work. year

John Anderson

me. for one Last

Northeast or terms seeing ramping could up, what forward? How in move about the I'm live I thinking delayed positive of some states some, some that Washington, whether of around tailwind did guess, maybe in you're in maybe Any have Oregon, going you even trends Oklahoma. been, in I commentary there be I sequential markets, of as Colorado, you've the and that that seen of think Corridor. somewhat guess, you better You newer the mentioned, mention some

Bill Toler

mean, be. I a bit. it frustrating it Virginia has been keep with around fooling Yes, should they

industry, New recently, Jersey, lot the of a New kind of York cold. quick good ones hot The has have Missouri out think, I kind really of stood a had state there. been seeing sales that been and for

yes, out. now. are There huge we is other to been been get that something that's we'd really or But the that sorted us windfall places we up You've was seen it hasn't hoped all well. pretty Louisiana hasn't surprise, they'll hope the for. are all doing going that by really think and tailwind Northeast I happen thought caught and wave popping been it that's that But the

Operator

comes Your from next Fargo Chris from Securities. Wells Carey question

Chris Carey

have stabilization to of Can you health as any just that the right concerns of there you on, to now I'm other? your or any as core the referring far on way you and industry? read growers consumer address the just as whether really the have one and whether

Bill Toler

You research insight as you've in of area a got and lot of do a lot this well.

we the And through still them. work As see to to you primarily a but directly know, channel. bit sell retail going consolidation. obviously you're the I We're I to mean, sell don't growers, with good close think growers. of

built. I think there's still, been in capacity certain markets like in much Oklahoma, far too

got has out lot think bit well. an awful that on California as Canada's I a shaken front. still

they that and volume down. going they moving trans that you're areas and serve, back early artificial do going around. overbuild supported of of these to that these have in And But I kind of will out by level wasn't that got are they going consolidated way had the now in back got think see markets some by in XXXX, overheated, they elimination some had shakeout I if an you So in will, population and some 'XX, a overheated capacity states probably really to shipments choose think stabilization operate you're key some get the infrastructure state the as legalizing, lot rationalization its think -- operate. each own as of things to to see to other that's balance I part

Chris Carey

durables? view you a and have even this. consumable lighting creating medium near discounting or this just I any recovery missed the near term durables as that mentioned more place the the on in just of So the going been comments Speakers] forward? on I know a portfolio… but this, term press focused What's and coming more out in on [Multiple are apologies you've all consumables we're portfolio strategic And your if release. But between and

Bill Toler

third and Air consumable and side one portfolio, some Active of versus Aqua two on ones our the ironically durable it’s are thirds, Phantom For durable. oldest and still our brands are there. Active sort had We of other

them biggest which caused LED, have sodium they're off gone sodium range and industry get completely everybody was in little speed in to actually inventory haven't, pressure the in very got Some out then we way think the I lights, and high a the a we're ahead lighting shifted right? limited of elements change kilter we to doing that high staying all okay. pressure of with back

of that business. be and the from to is bigger So products the that think recurring it's operate they've and to part going be lighting stream, across as But a still important strategy, the but our we to of each distributor. want in we very be representation is the But us and revenue more very We represented the consumables, that business, to think want the going branded rapid portfolio key manufacturer as We in grow nutrients got part is compete good. good our to a a categories lighting we also media. like all segments.

Chris Carey

the And lighting side. then one just last follow-up on

year this lighting come you down the You inventory process need to can inventory, close? still are you to ongoing pricing prices in your clear Is and a going the to be then just got general. an sense given know of as point getting where or

John Lindeman

year sort we're had pretty bulk or we work of think do taking across or of reserves and year, your rather, the question And lighting. span with the to the significant of pricing point with hard we last in amount the pretty that was of all No, of aggressive decisions really getting close.

think And to of through that, sell like earlier category roughly actually the back put XX% I be place in of quarter the so levels mentioned we probably lighting I the a we we through. about in sound may not sales our because that can kind from in IPO, it discount of to QX. it's that ourselves but And a were our when was business up actually lot, able XX%

did our mentioned team And that so really a I because job. good

more to strong do. have mentioned They really way this little we a our working of sort do of think we a through I job think bit good inventory. got effort. challenged sort of We did

bit QX to and initiative hopefully prospects in cleaner We have discount some on have for focused done without then of in lighting. the a kind through selling QX of get it in trying QX sort little

Bill Toler

perspective about of to on is that you the and And just look as the for category us the it to of you reserves the represents lighting’s percent after some that, a lighting value equal give sales now total inventories. at when

we So a been than much year that. in line so would we ago are in or more

sales important relative as to So get that's inventory very your a by you segment. that penetration dynamic

Operator

remarks. time. are questions to at this closing I'll There it further back for Bill no turn

Bill Toler

for soon. thank and look interest Colin, with in Take important you this Hydrofarm. to all forward speaking We care. you Thanks, all

Operator

your Ladies and for gentlemen, this concludes and your lines. disconnect please you conference We for participating, you today. that call ask thank

Hydrofarm (HYFM) 9 Mar 232022 Q4 Earnings call transcript