HYFM - Earnings call 4 2023 | Hydrofarm Holdings Group, Inc.

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Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hydrofarm Holdings Group Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded today, February 29, 2024. I would now like to turn the call over to Anna Kate Heller of ICR to begin. Please go ahead.

Anna Heller

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

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

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

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

William Toler

even flow XXXX, including outlook the to full Thank quarter cash our in we hard full for the improvement for initiatives, we margin and our adjusted us restructuring achieve allowed are adjusted good EBITDA several everyone. year. fourth the morning, provided both gross team profit, Kate, metrics XXXX in our and 'XX cost you, year profit profitability sales and the very savings Anna that in positive lower We gross and which achieved free execute levels. related reporting today, to worked had adjusted as at positive Throughout

overall our and working our our and our continued utilization space on capital on and in streamlining reductions higher-margin to management, enable distribution initiatives focus transportation Our in inventory logistics. product brands, proprietary reduction better included portfolio centers greater emphasis cost

ability cash from positive give last free cash overall balance about as are we sheet X and have liquidity Our in balance, perspective. we to the where fiscal a years me demonstrated generate confidence flow

line, the fell primarily short of channel. factors. U.S. top Fourth retail XXXX to range sales to lower our several the specialty due On industry guidance sales quarter in softness our were due key

been You may others hear the down closing the and industry from cannabis remains in U.S. retail have cultivation that challenges. in stores bogged industry facilities as regulatory

overall stores in These and retail facilities. led reduction issues demand an from to cultivation have

in changes environment. regulators down and Oklahoma, ultimately players example, consolidate are of enacting our We For stronger enforcement and will believe result. market more a create to closing a stable the the for these long-term will health good facilities stores industry as be many stronger as are

a number spots on, There to XXXX continue of like and are that will highlight. to build in which we bright 'XX carry into I'd

Our brands proprietary continue to well. perform nutrient

our XXXX positive higher-margin adjusted us them sales the In support helped fourth Because helped to proprietary of the to XXXX. of is brands you portion improvement and grew nutrient the XXXX. when and also mix product of in full year fact, achieve sales EBITDA compare one margin for lines, increased for quarter to

in -- diversify XXXX streams. area area revenue another focus An of was to our

geographic have area and product through both We progress in made diversity. this

of sales, floral, from total outside customers food, XX% increased XXXX sold customers U.S. the CEA noncannabis into lawn prior Canada, certain sales, our international Our which sales to of and up other garden and products in and the year. XX% about and are to

industry sales core us dynamics. we the Canada help navigating in the develop are are support In channel XXXX, as sales we our and will still will revenue continue and geographic but challenging Hydroponic business, to diversity U.S. diversity.

industry. cannabis Several for potential catalysts are on the horizon the

Act the is plant-touching of reinvest. the renewed retail businesses, players. which SAFER first enabling them institutional industry on Banking from and inject taxes to attract descheduling, possibility The legal life new by should should federal reducing into investment The both

XXXX, that means are use now there have as who an is Germany X beginning importantly, cannabis, And positively cannabis U.S. estimated swing which last states legalized live a adult-use U.S. legalized additional legalized the there's week. of as to XX% just in beginning well state. since recreational Momentum of adults an internationally

when are the I'm will work this proud EBITDA entire positive navigate and at cash delivering our team to and growth. year well are path continue Hydrofarm to that very flow industry of for their We in confident the forward, we adjusted free hard returns Hydrofarm XXXX. all positioned in

over it details for financial John discuss outlook results turn XXXX. John? and the I'll that, quarter our to of further With to fourth

B. John Lindeman

Bill, price/mix sales primarily everyone. year-over-year an volume the million, Net quarter were XX.X% good morning, a X.X% decline. Thanks, down by for fourth in $XX.X decrease and and XX.X% driven sales

was we While the anticipated in had which we the softer business, softness larger for than is volumes QX, standard sales expected. cadence

to quarter was driven promotional in a our well products lower-priced relative in of the decline primarily durables. higher-priced consumable price/mix Our by our mix products durable as as activity higher

year, mix XX% our approximately sales compared evolve. of products to And Our sales continues to XXXX. XX% consumable for the full in represented

our since brands proprietary the fourth ever to highest our our higher year-over-year level basis IPO. total quarterly on and net mix sales Our approached a quarter, of continued XX% in

of reflection brands. our this nutrient a demand proprietary was of mix the for shift encouraging Some

Accompanying sales brand for favorable our diversification. quarter the mix continued was

As Bill and driving focusing and in sales now for our and sales mix in nutrients what on international our from will total and sales. year look notably sales. as brands, international as proprietary our our mix noncannabis further approximately to improving well on QX X/X XXXX, further a momentum noted, our represent 'XX of In today, proprietary increased of perspective full most capitalize the working noncannabis we is

compared margin third period. margin or favorable This or of compared net represents fourth when the quarter XX.X% million expansion when $X.X our year-ago and was gross sales gross a brand in $X.X the sales expansion net quarter demonstrates the compared mix, in to to continued significant million period. and $X margin. profit expansion profit a Gross freight on lower year-ago basis XX.X% profit loss quarter more progress XXX to XXXX $XX.X of This productivity. gross vastly fourth costs million in improved was point Adjusted of million of compared to adjusted improved the

second As further manufacturing you focused may and recall initiated our we is a our on our from U.S. plan, of QX improve our footprint. intended includes phase durable to facility second operations. primarily which call, consolidations efficiency restructuring This product phase rightsize manufacturing

warehousing initiatives, our the when you restructuring activities, Phase footprint we along manufacturing durable we included expect XXXX, restructuring In have Phase X over X reduced that the with little fourth combine a In by XX% of of distribution million the noncash and will company-wide since start write-downs the manufacturing our associated XXXX. space. $X.X and total, our cost-saving sublease and of we which quarter, with expenses, inventory reduction recorded in end

distribution expense fees, expenses Selling, insurance The in costs. general XX% to center lower reserves, in $XX when by $XX.X was accounts million and were Adjusted million, driven $XX.X costs the and facility to primarily period. period. in a decrease million the administrative significant reductions was professional the SG&A in fourth year-ago headcount, receivable compared quarter year-ago $XX.X reduction million compared

going SG&A with in lowest adjusted public. third our expense which quarter, line since our quarterly was remained QX before Our total

compared expectations the a Adjusted of $X.X the fourth $X.X SG&A was in of year improvement restructuring, on positive loss million in higher our to cost-saving EBITDA, we our million our profits. period. quarter initiatives. million in year, and prior and our demonstrates improved notably, our and The mix of driven productivity lower a achieved Most adjusted which loss adjusted EBITDA proprietary by adjusted was gross for delivered full $X.X the expenses effectiveness the brand

sheet balance liquidity our to overall on Moving position. and

XXXX, as debt, debt million the compared year $XXX of XXXX. improvement million debt. of XX, December approximately $XXX approximately lease of $XXX to We and of $XX.X ended when was include million, an million by million liabilities balance approximately term with net cash end you finance the of total Our $X

debt As XXXX. and has does term facility not our maintenance mature no loan a covenant, financial October reminder, continued until our facility

balance X facility across entire revolving on quarter the fourth our We credit fiscal maintain XXXX continued throughout to the year. a and

from negative In yielding of the $X.X of million. $X.X loss of with reported investment a capital flow we operating cash million, fourth activities million free quarter, $X.X

disciplined positive capital working XXXX. year our the positive generate adjusted free us and helped management of the cash year full throughout However, EBITDA expected for our as flow

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

net to expect We high basis on XXXX. year a percentage sales decline teens full low for to the

to year. declines each expect As quarterly QX coming the XXXX, we decelerate the have quarter over seen sequential since we

also to improved initiatives. to sales margin increase gross cost-saving and and We profit expect an restructuring primarily in related mix due our adjusted see

than gross adjusted offset that EBITDA This profit We investments. XXXX. SG&A productivity savings and to limited expense more for adjusted margin is expect assumes the positive full adjusted some year improved

or to We write-downs any the receivable accounts significant for also year. nonrestructuring charges do full expect not related inventory

XXXX. flow we Finally, expect in cash generate to positive free

continue capital We working to will the of expect reduce million will million I we to $X note that inventory $X year. approximately capital do expenditures our in levels.

industry we positive XXXX. proved delivered can future of the the future EBITDA flow. deliver we in these we In year, free adjusted about continuing positive And and levels lower cash we of to despite This forward the closing, profitably and we optimistic Hydrofarm. remain operate sales look to as results

line. Thank for to open any questions. joining are Operator, happy we now answer the and us, you please all

Operator

Stifel. from Andrew Instructions] with [Operator Our first is question Carter

W. Andrew Carter

low wanted million teens I Could but the $XX high-teens have is, us as so gross thing ask EBITDA. flat SG&A. $XX implies as to kind there's that decline, there know you your therefore of -- of of take through to margin at guidance here well line I the million in productivity First lost revenue, kind to you

versus I the will up much us lag supply that of Can is proprietary on from you how in you the through mix underlying a brands. chain hitting as just mentioned improvements well gross favorable as costs? margin productivity/savings be like assume take

William Toler

Andrew. Thanks,

B. John Lindeman

improvement I it. ended adjusted that. mean will things could us heard profit Andrew, in in for driving the a on we year XX% versus that jump margin I an be year last gross 'XX. Yes. couple full margin. Obviously, mention you profit roughly gross There's XXXX adjusted of a

sales our brands, We basis a in so that that to 'XX. higher hundred have improve improved opportunity we 'XX proprietary couple of point expect mix, versus

I of proprietary more our one overall broadly, brands And of are inside of that nutrients as pieces business. profitable really really it know, of more the number think, you proprietary represent our

basis margin terms in hundred of couple a percentage nutrients. proprietary point have we opportunity think for of improve to of also sales We

located a we've and well, there. work reduced some of have there. in Chicago. space facility durable been related do X/X productivity On to pool our costs do we'll we that manufacturing and the restructuring top other reduce with and initiatives, cost-saving labor space think reduce some little that in gone already basically and bit of that, to our pretty our that's more we've But and that We've instituted overall, instituting overhead of

consolidate in of We further have with extract our respect bill operations. And productivity for accomplished quite consumable that's facility. the an and nutrient improving our in while also terms to should opportunity savings yet to similar some manufacturing our 'XX on costs main that, overhead and manufacturing haven't reducing of facilities we

you through also in freight that think our savings year captured We really see we in of some back as results 'XX. last -- half I XXXX, the

as some We lap achieve benefit first 'XX and to we continue LTL will lower the get in freight rates. half local of

the that a the first of comparison will year. So in be favorable half

very On our top in of way many the have still SG&A we coming are benefits at that XXXX. that, level,

XXXX. -- lap by terms of savings We reductions. that we achieved almost last year We only during headcount in benefit reduced headcount have XX% from by expected

And so from in should first that. XXXX, benefit see half the of we some

We lower excess have some of of distribution warehouse insurance fees, subleasing professional top lot in activities. to been on distribution facility space. that, expense we'll our costs savings. 'XX, And related a subleasing we have our also expect We've then

I think of we So come, at think of which at mean, gives margin profit to lot is opportunity, you're the already I savings a well more still instituted, of opportunity us as as which we've the gathering, gross going level. there's some savings much as level which SG&A

W. Andrew Carter

the is is, should there. press economical? in of there a third is has kind different think GrowGen as Quest That's kind out of business. on release manufacturer/distributor up more those or obviously Scotts really just like got were of of out and I to like a we there Or the a Are that guess picked the signature. helpful. become question the direct largest They're I more landscape in retail out kind now of is some third-party distributed think about opportunities driving focusing focusing of for of lot second that just just on -- the going proprietary? some looking brands solution terms play What for party? the to this we

William Toler

Yes.

is What's I the the it's winner for Andrew, right? think big part of things happened the proprietary that distributed question, clearly of side in us, the been good hydroponic the primarily it, third-party a has as brands primary things. retail, direct These distributors, suppliers, of other last years, over the to number and delivering and few Hawthorne to volumes. weren't us lawn garden went other

diluted of kind a number of they've so across themselves market And the supply points. with

whatever, what we however we to of the because benefit is us we in last makes And for done but our year continue profitable are, house distributor call on uphold sure have also it make to So seeing house you industry the EBITDA because conversely brands. them. those the able slightly that, you're supply really brands, positive of doing mix be that us signature proprietary focus driving

grew said our Well, as than our what well, John's actually In proprietary a story that's script did. different very my brands in I total year-on-year. and we nutrient think that company

frankly, guys And of distributed diluted these industry. this -- across they has mix driving distributed of been we're those the as points number And -- brands. brands out across And bus. it's But partners to we'll have. proprietary to figure in a have all the in kind right mostly the well a is go with as supply the of weakness, themselves forward talking good really, to

Operator

from question Grom UBS. is Peter next Our with

Peter Grom

I to So wanted I wanted -- ask on ask visibility. just to

the downward implied I look was would of It's levels. business year, You been have pronounced And the back this just more has step like kind this know it XXXX has feels you far a guidance at take below kind even pressure I kind for but of we back, going of to the just and cyclicality, than anticipated. revenue model. all

said for year, what's guidance So of to understand when that? reach years. that? degree kind the the of to trying several are here, when high-teens confidence a seen of we've of the the teens decline, Just will drivers we last just performance about we underlying you this What low think kind over bottom in given your

William Toler

off than Yes, felt slightly out, responsibility think coming plan bottom. out level right? to year our lowest question given right, reached the which goal scenario, be to better that kind it profitably And at is we I and let's beat -- really a I here those numbers, right? of was it's is at level. a outcome. good worst, that, profitable say That's sales then come and go be we in us for ready the at have we to is we've That's you the profitable it, think to teens, And then and the should and important The all to then to then hopefully being really with and that, a of high have try really say, we right? the like let's when are so business get worst-case we nice need

bottom. But I at think a are we do

I better. see think some things industry. months think I a at bit X been the frankly, starting we've you're little X And get bottom, an or last a as for to

March, into good than Media a bit year April, around the Growing kind ago. better looked May with the of a Our lot prebookings did it visibility of a

put this And year's we and the we'd around got think the those a set lowest level distributor guidance. up brands hitting important But we not drag to structured then beat there our our we're our has talking about on trying at to what -- it's there, structures that's we've goal that creating like possible and sort how among that this out and out going that strategies we that's cost making the anchor really is and created numbers. But this also money where be. of total us and being number really it dilution number

Peter Grom

up helpful, think in guess Andrew's how terms I just question you very And X. model? on anything a kind EBITDA I is That's just our adjusted of of like positive maybe Bill. should following some guardrails on question. provide up obviously positive Can that, we guess, the above maybe about Like, following

similar and we too something not single-digit weaker we Just both saw we this at optimistic expect to improvement? that's the versus we And far if dollars have outlook. trying of because consensus the given profit million year? kind sequential point, more should range. in dollar EBITDA that's revenue Should what high understand I'm Like this expect sure

William Toler

Yes.

had optimistic to last this year. got point be. it said at higher point, very it than like higher that, was year, we'd positive you fourth a We're it that I at think more saying and And is -- this modest a positive this you consensus. created sort we quarter modest. because that and was It building off 'XX of modestly

in do much we're how dollars in to many certainly a Yes, position any putting start we'd be, where. like or will around I than of better guardrails nearly did how millions yet But of not to think we XXXX. that kind

it But the we a on range on lot what depends of come in top line.

our on kind to of depends on going In be finer expect range point are all to we're to that. it to of ready any be work we've be fact, But because costs to put much under but that EBITDA not control, positive want very got and year. this and we

Operator

is Securities. next Bill of Our Chappell the Truist question line from with

Davis Holcombe

This Bill Holcombe is for on Chappell. Davis

legalized new in? that X sort all what You might be just operating XXXX, states of of demand kind the they states you of of mentioned may of maybe have we're kind to some adult-use environments you all states. had out seeing wondering regulatory And legalized those the newly compared what are and in existing

William Toler

Yes.

Californias or the the your of better performing they're Ohios to first now. or Michigan. Oregon scale-wise, very right some states small I are our or The whether of all, challenges, it's newer compared Colorados think or states, they Missouris,

And even up. political slowed between that kind course, to while There's picking have implementation it. a New Jersey, of New they've and places like in there's but a dynamics takes then, finally legalization of it implementation. actually in lag do York and So been the

that these the lot It's matter total bigger California of you're XX%, than seeing the business. by of you've to itself be new shift now. that but long states got definitely a mean XX% just a I used legacy are scale that ones,

the Now everybody business it's probably for it the into less. And a thing. in as the that's XXs balanced shifted states think industry true to in overall the low or more I newer

strict, half the that And licenses but one unique Oklahoma just they're in that what are in got cutting had consumption. gotten point, point from License folks you a Oklahoma U.S. more you in had Oklahoma good little Oklahoma's -- were and regulatory nearly in encouraging which a at there down. they under them at also because one are fortunately, production where have need XX,XXX and balance of cut dynamic of half is Oklahoma,

to are number regulating and tied they're ultimate of the of much of a better the The with job from population dispensaries mistakes newer states tied number seeming demand. doing learn of the the others, grows, actual with and

people federal the it's huge The and interruptions So just will, has are a sanity, whole if kind more but years. a and category been than very slow cast or you the lack it shadow X federal of lot learning, over in of last guidance X very, really be. this should for

Operator

Redmond Our Jesse next with Research. from is question Tower Water

Jesse Redmond

certainly Schedule up helpful business? to potentially operator? that and you, meaningful question your a are see and a plant-touching for the increasing not CapEx? a you is talk that do could We're the bit thing plant-touching just budgets looking being biggest III catalyst III be at you for side. you Or catalyst on you Schedule the businesses, horizon. freeing see multistate Can removal had the on I and how operators a as [indiscernible] little the potential the although about Do

William Toler

and particularly just can durable think to whole around be and in confidence again. the No. but lean time category sentiment now a important that very a of invest a catalyst it's orders, that also in We terms

the I got been Interest think on capital you've staying got sidelines, [ obviously, harder. holding investors sidelines, rate's, people on MSOs ] staying you've the back.

these that, So to it's businesses. put hard on you get that's -- if can

this of waiting is everybody for from III. kind as move big pattern so Schedule to I a And in holding Schedule we're

have legalized frees don't up As to course, flow of tax they'll those be today. is benefit they businesses you that lot cash plant-touching a have can the of indicated, the and And burden for once for lean category. themselves, the the back they biggest -- into able retain currently there, that them

benefit little orders. a or But a to So us. see as are number going that that placing to we up a turns projects the definitely when over of seen take starting. time and are people delayed, delayed, Certainly we've when year of kind to actually delayed that ramping have from been X last it

we're referenced ago get demand and going back So to catalyst going people the a regarding come this to is I in balance and/or has happen hopeful that more moment Oklahoma. as in are as supply

the people more category it So to I the pattern. get stuff also to now speaks that yes, and industry. a to of would all that going normalized rescheduling, a we're be And think lot to trajectory descheduling growth a back whole benefit confidence normalized gives and

Jesse Redmond

little flip That's helpful. talk and to states? And Florida they could to if biggest you that increasing how move see potential this And state on there? would X markets side, a those Pennsylvania. year about you Can the sales, spending adult-use the last were bit are

William Toler

Both governor here like And it on has people's is said November, Yes. that opportunities. expectations, looks of it in has is, to for ballot which docket kind be a of on been the the in it's while. incredible one terms fantastic. is Florida the going are

Pennsylvania, I can and us, Pennsylvania, in for important see to over situation. is or closer Both in XX of catalyst number of those to greater similar you that very, population up around in XX% category. think, drive are that million probably population percent a of Florida XX these million going very

So be part going expect we to do the a growth big forward. of that

B. John Lindeman

better comping has. us been have states than the those population for overall of both Jesse, And

Operator

of is Aegis Weber Capital line with Our the question from Corp. Harold next

Harold Weber

you regards questions -- of inventories. issues to previous out any see One is is more the of presently? to with benefit to Are there satisfied imbalanced Is that my in that? in How that? regard that

William Toler

X-year in of are Some the by that total of direction. in okay? trending close reduced a the was inventory getting right our there. of start down period majority $XXX There's sides workable million, really We've inventories to I'll write-down, manageable, the thing. simply inventory but that levels. inventory Both to vast Yes, X was

And on still than this We're could now. run XX worth $XX have bit to this we million million, out so total. days' able a we another at We industry to or of number that. think of we've like right take higher to got more be we think go. We'd company inventory probably the $XX

So that's a terrific thing.

other of what far from 'XX we're even high to dealing chain had is had volume far, COVID write-downs 'XX supply with we we less industry piece back and whipsaw compared far, again, The in inventory in improvement we 'XX back in to days -- 'XX the compared as from days the 'XX 'XX. and to

the So in exaggerated sheets. balance had everybody's inventory gotten

we've all down. worked that So

try 'XX. expect write-down So is our -- protect we to great, and protect month. very the to in manage although them have we it in and inventory sort 'XX, issues you aggressively balance And protect Don't very, didn't our those quarter investments. still have of do and again sheet which every every

B. John Lindeman

Maybe add just to some math to...

Harold Weber

I'm go Yes. ahead. sorry,

B. John Lindeman

the ago, the love And to last quarter's over We about heard say been million sales. roughly XX just $XX of with days ended on of second some this Yes, million you -- a with him we've worth year in math Bill's past X or inventory. quarters, there X averaging comment XXXX demand. we'd to business basically to add worth $XX manage

ability down manage and hear further about talking why there, us you that's into XXXX. an real that us of clearly, there's opportunity to So sort for

Harold Weber

call to what to be start business cost, by able turn rightsizing, would cuts your we're be bunch you're to spending able to add regards to forth, add you without increase like. what a bit the In XX%. that having business so Are think a again? to -- hopefully, to do made and a you it, little you've up, the going [indiscernible], see cost that going I layoffs, going fulfill to before back capacity, where having think should of you you whatever back of on those Okay. whatever based to improves

William Toler

you X Well, DCs. the We'll costs, in footprint. top come did DCs dramatically in with we some obviously, our the we as have But variable in have alter staffing importantly, down line, not U.S. have

We over have Europe. X ago. have one And was in the footprint we and in years we Canada, had X that

instead done to vacant we've space will. been to if others, space you underutilized we've basic service subletting us and is allow to What provide

the very We way more and or 'XX touching our And and easily. cost volumes can money so handle customers. we've would support structure we're these in 'XX able costs that very, back volume. and have we scale but But the very you of some levels at where as, to had low back down able up have we also 'XX on structurally, screwed to now more people make can got really quickly 'XX be up to course, our

Harold Weber

so they the Is bit So increase the in that revenue that's mean spread me that that based would cost more. reasonable to hopefully, going expand quite a overall expectation? that to happen our a margins on should

William Toler

Absolutely.

the able as the forget think very achievable forward. to our when going time. could certainly ours, industry good a were Let's going X any growing returns profitable get are a not with growth But think be that I brands not things we next in toward to we that have mix there were better. powerful probably months. to proprietary we position and We're XX% that roughly really time years brands that over And drive and profitable, more ago, X business XX a that number EBITDA change we're our

Operator

his Toler Bill? comments. the conference there further to hand questions, no would now for Bill As over I closing are

William Toler

forward appreciate We speaking Thank care. look and Ryan, this to we to morning, your the being of support you you, of call you on all Hydrofarm. and continued Take soon. thanks for

Operator

Group for Holdings has conference The Hydrofarm you. of your Thank participation. concluded. you now Thank

lines. You may your now disconnect

Hydrofarm (HYFM) 29 Feb 242023 Q4 Earnings call transcript