Hydrofarm (HYFM) 7 Nov 242024 Q3 Earnings call transcript

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hydrofarm Third Quarter Earnings Call. [Operator Instructions] Please note that this conference is being recorded today, November 7, 2024.

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

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

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

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

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

in Thank improvements profit gross our gross you, Anna achieved Kate, margin. and and good morning, margin everyone. we solid In the year-on-year profit third adjusted quarter,

margins. is on providing the yielding year-to-date, percentage have brands quarter as in our our our boost as focus both of proprietary for a Our sales, continuing a results increased net they and

restructuring effective the adjusted cost savings also We savings line SG&A on significant through realize continue our actions. and to

have hit remain, large for industry full challenges seen close to year With track on we remain seasonally us were stores. metrics. our weaker key and sales said, net that several outlook our Our on retailers as we

brands number strong of media in bright from select cover to spots categories. consumable saw We the proprietary performances the and third nutrient I'd quarter. now other the like a in grow

of in proprietary Specifically brands achieved solid Peat several had our key saw growth, while we quarter, nutrient the Aurora significant year-over-year results.

good Active PHOTOBIO side, On saw lighting the we on and durable Aqua our brand. our performances proprietary

We needs. Nutrients. meet we behind distribution distribution invest quarter, proprietary announced look evolving relationships Hurricane will partner Mills growers' strategically dehumidifiers, our relationships brands as Last to or brands, the we several continue to Fans including Quest with and new key

partner top line new in third to These added our quarter. the brands

However, period. these the more of they sales bit but performance upside the investment. optimistic a the for We balance did about inventory with our partner weigh cash on future in flow brands, remain we'll

progress our saw also in of the We diversification revenue sources.

We continue to continue customer food, floral, non-cannabis seek channels. international our expand ways and lawn and U.S. drive presence the certain Canada products CEA sold to including to garden sales, other into outside and and

increased non-cannabis our hundred compared of sales, basis Canada revenue As a sources QX points to percentage several non-U.S. and last year.

finding U.S. this more were percentage become revenue to in diverse reliant And to greater and We less year cannabis are of these expect in XXXX. and ways Canada. sources a sales they we than be on the

we our reduced and and have the since possible. and the to and of took as by XX%. by consolidate more integrate, reduced manufacturing we beginning priority, third space Improving top almost manufacturing have XXXX, optimize where XX% manufacturing Notably, our steps productivity profitability drive remains a efficiencies cost we now distribution nearly footprint in and footprint quarter our total

X have a level. efficiency dollar testament XX% we footprint. year-to-date. margins meaningful on-time And year-on-year customer-centric We've our our absolute deliveries of adjusted an initiatives, SG&A adjusted also at these enhanced throughout profit and SG&A pre-IPO achieved consecutive operations, adjusted restructuring the effectiveness in months savings of our X and and adjusted customer A Our now X EBITDA have while actions profitability have of completed excellent distribution maintaining the savings. initiatives and for to we our service, is quarters realized and quarters or gross above consecutive increase below cost cost

state on give of industry. the to quick the like I'd a update

great We And available, users, said, operate into XX% a nearly of National indicators, quarter across cannabis consumed. which the as This readily continue That in actual the continues according environment amount monthly actual some industry. is indicates we move survey, a are country, XXXX. With which there challenging last growth including up in to runway of being adults our of massive for positive as that the is a consider encouraging. XXXX runway the of cannabis or significantly. future to cannabis

and to other X encouragement December from on cannabis a represent regarding cannabis environment The of of legalization to positive Schedule which of reclassification restrictions These U.S. the III, a DEA I would towards growers. in cannabis states. cannabis U.S. forward flow One for growers dynamics industry developments Schedule for scheduled the loosen step continues help in the hearing of proposed would more and licensed on legalized across regulatory supply source side cash the be inject progressing the has life

demand our growth drive meantime, In cost future. ability turn have We our the optimistic will the still we additional products for to to continued in are deliver savings. around show and

proprietary guidance demand restructuring growth our flow. Looking we to are the related once return ahead sales, industry. EBITDA volume full reaffirm am strategic controls and we're and with revenue for our cash that XXXX cost net initiatives, free focus year I happy adjusted our source brands, and and confident to for positioned on diversification

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

for The the remainder year-over-year, and was decline by volume quarter promotional third in and related dynamic by to mix $XX were during We the pricing see to oversupply sales Bill, volume the XX.X% activity the to quarter a similar pricing the year. decline and alluded driven driven this industry. in was good a cannabis a pricing down in period. million, of largely primarily Thanks, last expect decrease The X.X% decrease mainly for in XX.X% everyone. pricing. Net morning, mix

products sales increase total our compared sales year. Consumable proprietary in XX% Consumable our was comprised total to mix in up an last than net XX% more products durables. X/X during represented brands as again of Overall, total the year our solid XX% to of sales, QX QX, once our made of approximately brand outperforming compared period. prior

last proprietary Importantly, proprietary even even brand within with mix greater we our a our brands -- of compared year. higher-margin sold our bucket, to

gross of within profit sales of Gross due The quarter or $X.X year. point sales, basis mix sales million proprietary was X.X% net compared last $X.X XX.X% the a Adjusted third of quarter was XX.X% $XX.X in of of million in or million period. or better sales, net in year profit net $XX.X ago facilities. higher-margin increase to net primarily XXX sales manufacturing is and to XX% branded select productivity compared or increased the to million the our

no write-downs quarter. significant inventory recorded the during also We

quarter continue mentioned, sixth sales on improvement consecutive our adjusted margins or operational Bill our execute to our strategic this profit was productivity. be As at room improving priorities, That if continues XX%. for with and brand proprietary above including gross focus on further we there to said, our

here recent on A restructuring cost-saving actions. quick our some and of update

greater by last in June, our grow California in in closing mentioned than Northern facility a we quarter, XX% followed manufacturing by we our media reduction our July. smalls facility, As consolidated

Canada. plus moss Our X manufacturing harvesting is in now processing our facility locations peat concentrated and U.S. in

efficiencies cost quarter, from consolidations. but we began small the to During and savings these incremental realize

currently are center optimize We including logistic and partnerships in to of one evaluating third-party for DCs distribution our our Canada. potential network, more opportunities U.S. or the

functions, system X main our one integrated U.S. Canadian entities of successfully and ERP operating now we fully achievements these and on our next consolidated to and Canadian we back-office integrate during front previously into the quarters. office intend over quarter. Building Lastly, the teams our our

our drive of We further synergies the details as potential and on We we efficiencies quarter operating team. actions border. forward sides to to business into revenue next cohesive sharing these one expect look streamline more both

to to Moving $XX.X XX% general Adjusted significant administrative and million reduction to line we have the last to and expense last on expense, costs. was our where XX% to savings. selling, were due $XX.X when third reduction compared our wide compared reductions realize expenses These items, $XX.X expenses, year. including million a to we facility savings $XX insurance SG&A year. of last headcount the a achieved Year-to-date, fees nearly range million, SG&A professional a adjusted continue million SG&A compared are across quarter, In year. on reductions,

restructuring EBITDA sales levels. the to and $X.X our Adjusted doubled our in of initiatives cost-saving third the on operate adjusted slightly was positive quarter year-to-date, profitably EBITDA and than to and lower ability million of XXXX, success demonstrating more our compared has

balance on liquidity Moving position. overall and to our sheet

third of end quarter quarter $XX.X of $XX.X debt cash balance million, down and last total from We ended $XXX.X debt, year. $XXX financial as the at XX inclusive million September of our million liabilities. million lease was second of approximately the the term of with balance of Our

end approximately at the debt net of the was Our $XXX quarter million.

reminder, a XXXX, term revolving our our does facility. maintenance to until no we loan facility financial October covenant balance and in has mature a and maintain credit not X As continue

the With negative $XX position free flow million us. availability untapped expenditures of our a million. negative cash flow million, cash on $XX capital operating we on million line have $X.X credit, activities comfortable of liquidity, from In of $X.X total third of our hand of over for and million revolving cash with reported $X.X quarter, we over yielding of

partner new capital that was and in the people referenced brands working flow temporary integration. from earlier our in related Bill investment U.S., delays impacted cash Our our and Canadian ERP quarter by

cash our quarter achieve have fourth cash pressure put these While impacts on free the reaffirming full positive are expectation both we year. to flow the for and flow, free

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

Net of our high towards key of basis. to which metrics. a our for tracking middle reaffirming calls guidance percentage a on range, XXXX outlook are decline are on We teens the low sales

adjusted an for free full well, full as reaffirming positive We of $X.X and expectation is million million EBITDA expenditures. cash capital $X.X year positive are for flow updated year which includes for our also to of expectation XXXX that the the

included also today's year our of to full release. in couple We a assumptions earnings updates

the potential of business. We this long-term are confident in

execute our remain at the and our mix streams committed to to brands. operate revenue our proprietary continue further levels. via improving We have successfully to profitably including sales cost-saving on diversifying We lower strategic proven initiatives our our priorities, ability sales and

an also any We and industry profitably. are believe demand about eventual turnaround to well positioned capture we incremental optimistic are

over back the to will turn call I Bill. now

And in on John. announced turned John before time is role earlier when as CEO over believe January this to involved from for take to closely and the the as as be long-term as and Executive the Chairman the change. X, Executive and not we Thanks, anywhere. this opportunity the largest Hydrofarm. the transitioning will month, and shareholders, right I I success am will last company's I'm take of to strongly Having one for questions, committed now just going really Chairman That retiring me year, the of make I'm CEO. we the company XXXX, as fundamentals growth effective the XX said,

the leadership potential of deep realize the The for a already as could environments. This necessary confident The to very helping place the an Board be team and of for a in leader this not natural and progression. I and to complex be necessary drive John continuity provide numerous him. us seek industry is support proven them have integral seamless the leadership. through team And who's more as I'll we part is last years. the around and Hydrofarm. will X business in transition John we been John

Operator, now morning. questions. happy Thank open you to the please answer line. joining all We're your for this us

[Operator our Andrew from Instructions] Stifel. question we'll from take Carter And first

I ask to the distributed kind of is brands. around wanted First question

some out cement there a basis looking a capital just lot not that's anyone up third there? of Obviously, lot helped profit for signed demands Or demands? times but kind Hawthorne there new profitable? position. Could are is worth you flow. Is quantify they've it to the You It a of you partners kind on longer distribute is weigh or no BFG's of mentioned. does the on distributing out of partners, what out either which working the outlook cash party, there incremental

work they scale trends, we us has for right? Yes. recent The demand particularly the entire have whole for us well and and when a Obviously, with for challenge brands work partner for been industry. us, scale,

mix, Hurricane taken and brands some are The There's in certain long-term good on a out that garden at the distributors consolidation that I for further to interesting to really we So the the come media list, us there our side way ones potential. who have they've of are very top of and some Quest that. really lawn also are brands have really, down grow come large nutrient and that that are partner been kind consolidated got and of have right? way. and a handful of an just ones The good certainly the mentioned of think Mills --

us, some up So us until XXXX. that's of big a that's That a and are that actually we to the of business think we're realized part making the really especially viable back. being viable also once the count today, we comes provided industry where right won't footprint that sure have that distribution But right SKU be opportunity levels our are right distribution the said, the and industry clearly we lining we service for we customers. to have

positive be few we're but business struggled all at force. to distribution coming good So that a think in a hopefully, close to the to that last We've can scale to scale. that being get back years, we

independent I are second a then retail the And it. closures that know you there. mentioned out Got question.

customer kind X sets. got of You've

independent independent on seeing retail. churn have kind commercial anything seeing you are then there? retail on your kind Or just Or the you We and commercial stability just the have of of your underlying on a the You trends you Are on exiting from -- customers? understand industry? either business.

been The you're retailer retailers brick-and-mortar -- right. The the consolidated. Yes. -- have

close what those consolidate I inventory stores. But also dynamic, means buying, own their X-step their to is largely They have that into other and a have that's now. they eat inventory happens stop stores, then but you back over and right? of sort stores think that the

really on to own their store they're inventory So to a and pipe, there's will, another us, to really back as takes us. kind it delayed if come one for consuming of from it you because effect longer consolidating

that certainly in felt felt we kind right? all So QX. of year, We've that

kind Florida below all through. been On come okay, The to of has X was it surprising. the XX% certainly pass. been Obviously, waiting other the or takes DEA And but majority that wanted side the pass, of times but that these big a to we really threshold. to of that few people have to people up will it way There things we've pass, was in meeting regulatory hopefully, of of didn't usually Florida soon. get got and these not it the It's early for commercial not lot it a coming X years have It for levels things, saw ago. did changes December.

catalyst the think commercial that I gets going be again. will that

this of for that's years in channel Another us viable certainly been and over very couple is the -- the e-commerce. last last year

comfortable So last e-commerce it now business delivered bigger part is e-commerce way. as a the products of are and years few than had ordering from been more the getting people in that over

you've brick-and-mortar. really, weakness got in So

to as kind back that's that's is emerging hold, if you've us e-commerce industry. got on it commercial especially there's got and for been I a a ongoing but of event. probably rescheduling You've going pick a bit the channel strong for think And up,

to go we'll next, Redmond And Tower Water Jesse Research. with

a than medical to not market couple I time. specific but you we if about would hoping for I That's more that passing Florida. were was double little curious, have talk billion you're know you over about of leveraged that talk a implications specifically Hydrofarm? market, if super not more would could bit curious Bill, that what could dollar

and that XX. didn't he's pass. came is it reason and going for fact that bar this was to of fact that that get a people that setting than Florida before they'll it. in encouraged certainly governor progression probably know am the favor more it. the through. said want the These take The do popular was for take it very time yes, out they it Trump get Yes, here. is at we voted I The place XX% not generally say setback ultimately things is almost that one the eventually

me So that kind happen of that leads and can going to should forward. believe good things

in But any Florida. you're have center right, really distribution closest don't we don't have is footprint distribution the a huge have we here We centers. Pennsylvania.

obviously in state. don't the of we have So a infrastructure We any brick-and-mortar. lot operate don't

of opportunity things, really leverage or cost growth people cost for other the growth and the don't here down and here in the might. our but and growth challenges in like the some the infrastructure for we consumption have sort the So consumables was

we a that rescheduling we other outweigh the have here headed to So going it and macro what of happened that far is Florida. are think down while the things, in setback, our might hopefully, direction, benefit have

And seeing front M&A with on you're your consolidation? do of cash some strong balance position, sheet a you're relative perhaps little to and you about opportunities operating strength. position Can from more a bit the talk

Yes.

do I think a player M&A right afford with price, are things. really looking go that for our different at of the to not of couple meaning and his going a longer to cash lot equity reasons plant that to not to perhaps are keep continuing out have can of dialogue the M&A. we're outsourcing then going But their our on. been volume has We've operating. current all things with M&A, people a front admittedly preservation of there's us, and own smaller If no a couple

kind So haven't that opportunities, different way. with while us come to perhaps number Those up people. pick of of consolidation, with also discussed a kind been of volume fully they yet, that we have

we're up we downturn. people to that get help some looking pick through So way may this as other volume

to have still industry. And having that that about dialogues combinations we make people multiple with approaches same and front, for us potential we leverage. and brands of remain lot sense of a different On for kind strategic do the good

leverage. lot We partners have to of a good distributor

long-term say, create shape, can our of that have we've what been right because a undrawn not that, anything the and situation solution. got an in shareholders good prudent ultimately or for revolver. for right balance our lot we like that we us value rushing is you But sheet didn't know into wasn't have good in things the We lead to

that's We've not all the where X got got of We've last protect quarters. X making things in money out X we kinds We've for more debt still of that are. years. due been

And way. so do we that to to position in over also prudent we've get and a change it where we but time, stand. know We got we want disciplined

'XX? finally, there? congratulations forward how on be the SG&A more about controls. room And to helpful. you little thinking cost have much That's bit cut Can we in might moving about continued a you talk How

now think, Yes. to we've, I pre-IPO can we to Thanks, to is Yes, there we I Jesse. mean, our little comments where over and proven jump time continue in that on nip bit I mentioned that at more Bill we one. I'll tuck room. bring find in a look, are ways mean that levels, as earlier. down.

So it in us does there's but get opportunity little a 'XX. more for some tougher, there bit

I'd call to any remarks. turn like closing back over Toler for or to the Bill final

everyone, and on the and we the Thanks, care. Great. and for speaking interest Take look support Marjorie, in to you Hydrofarm, forward thanks, soon. to continued call

conference. today's And participation. for you. gentlemen, Thank conclude that and thank you We ladies your does

You may now disconnect.