Q1 2024 Hydrofarm Holdings Group Inc Earnings Call
Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hydrofarm Holdings Group First Quarter 2024 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, May 14, 2024. I would now like to turn the call over to Anna Kate Heller of ICR. Please go ahead.
Good day, ladies and gentlemen, and thank you for standing by welcome to the Hydro form Holdings group fourth quarter 'twenty 'twenty four earnings conference call.
Speaker Change: At this time, all participants have been placed in a listen only mode and the lines will be opened for your questions. Following the presentation.
Please note that this conference is being recorded today May 14 2020 full.
Speaker Change: I would now like to turn the call over to Ana Kapor Hello of ICR to begin. Please go ahead.
Anna Kate Heller: Thank you and good morning. With me on the call today are Bill Toler, Hydrofarm's Chairman and Chief Executive Officer, and John Lindeman, the company's Chief Financial Officer. By now, everyone should have access to our first quarter 2024 earnings release and Form 8K issued this morning, as well as an investor presentation available for reference. These documents are available on the investor section of Hydrofarm's website at www.hydrofarm.com.
Anna Kate Heller: Thank you and good morning with me on the call today is bill Toler, How's your firm's chairman and Chief Executive Officer, and John Lynch amending the company's Chief Financial Officer by now everyone should have access to our first quarter 2024 earnings release and form 8-K issued this morning, as well as an investor presentation available for reference ease off.
John Lynch: Events are available on the investors section of Hydrophones website at Www Dot hydropower and Dot com before we begin our formal remarks. Please note that our discussion today will include forward looking statements. These forward looking statements are not guarantees of future performance and therefore, you should not put undue reliance on these statements are also subject to numerous risks and uncertainties.
Anna Kate Heller: Before we begin our formal remarks, please note that our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from our current expectations. We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial conditions.
Speaker Change: Cause actual results to differ materially from our current expectations. We're here for all of you try recent SEC filings.
Speaker Change: For a more detailed discussion of the rest of it could impact our future operating results and financial condition. Lastly, during today's call, we'll discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP and reconciliations to comparable GAAP measures are available in our.
Anna Kate Heller: Lastly, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP, and reconciliations to comparable GAAP measures are available in our earnings release. With that, I would like to turn the call over to Bill Toler.
Speaker Change: Earnings release with that I would like to turn the call over to Bill Taylor.
Speaker Change: Yeah.
William Douglas Toler: Thank you, Anne and Kate, and good morning, everyone. I am pleased to report that in our first quarter, we delivered better results in many key profitability metrics, including adjusted gross profit margin. Adjusted EBITDA, Adjusted EBITDA margin, and free cash flow. In addition, March 2024 marked the fifth consecutive month of sequential net sales growth for Hydrofarm. That's the longest string of sequential monthly growth we have seen since our IPO in 2020. Second, we have now increased our adjusted gross profit margin on a year-over-year basis for the last five consecutive quarters.
Bill Taylor: Thank you Anna and good morning, everyone. I am pleased to report that our first quarter, we delivered better results in many key profitability metrics, including adjusted gross profit margin.
Bill Taylor: Adjusted EBITDA, adjusted EBITDA margin and free cash flow.
Bill Taylor: In March 2024 marked the fifth consecutive month of sequential net sales growth for hydro form that's the longest string of sequential monthly growth we have seen since our IPO in 2020.
Bill Taylor: Second we've now increased our adjusted gross profit margin on a year over year basis across the last five consecutive quarters.
William Douglas Toler: And we've achieved positive-adjusted EBITDA in three of the past four quarters, demonstrating our ability to continue to operate profitably during the industry downturn. While we are far from satisfied with the $2.7 million of positive adjusted EBITDA that we have reported over the last 12 months, it is clear that our cost savings and restructuring actions are making a difference.
Speaker Change: And we achieved adjusted positive positive adjusted EBITDA and three of the past four quarters, demonstrating our ability to continue to operate profitably during the industry downturn.
Speaker Change: While we are far from satisfied with the $2 7 million of positive adjusted EBITDA that we've reported over the last 12 months. It is clear that our cost savings and restructuring actions are making a difference and when sales begin to increase this volume will make an even larger impact on our bottom line.
William Douglas Toler: And when sales begin to increase, this volume will make an even larger impact on our bottom line. Our biggest opportunity is to continue to find new and unique ways to drive profitable growth. To accomplish that, we are innovating and expanding our brands to address growers' needs. For example, at the end of Q1, we launched a new and improved PhotoBio LED light designed specifically for commercial growing applications that offers 10% more light output, 47% less weight in the fixture, and increased efficacy, all at a 20% lower price than comparable models.
Bill Taylor: Our biggest opportunity is to continue to find new and unique ways to drive profitable growth to.
Speaker Change: To accomplish that we are innovating and expanding our brands to address growers' needs.
Bill Taylor: For example at the end of Q1, we launched a new and improved photo bio led light designed specifically for commercial growing applications that offers 10% more light, but 47% less weight in the fixture and increased efficacy all at a 20% lower price than comparable models.
William Douglas Toler: While we were still in the early innings of this product innovation, we did see year-on-year growth on the Photobio brand in Q1. Second, we continue to diversify our revenue stream by driving sales in our non-cannabis markets and broadening our geographic reach. In Q1, our non-cannabis and non-North American revenue sources increased to an estimated 32% of sales, representing approximately a 360 basis point increase from the prior year. In addition to our diversification strategies, the regulatory environment is finally getting better for U.S. cannabis growers.
Bill Taylor: While we are still in the early innings of this product innovation, we did see year on year growth on the photo bio brand in Q1.
Speaker Change: Second we continue to diversify our revenue streams by driving sales in our non cannabis markets and broadening our geographic reach in Q1, our non cannabis at non North American revenue sources increased to an estimated 32% of sales representing approximately a 360 basis point increase from the prior year.
Speaker Change: In addition to our diversification strategies the regulatory environment is finally getting better for U S. Cannabis growers, it's improving and will help drive us drive sales in the industry and the future recently, we all read the DEA will break will propose the reclassification of marijuana from a schedule one to a schedule III drug.
William Douglas Toler: Its improvement will help drive sales in the industry in the future. Recently, we all read that the DEA will propose the reclassification of marijuana from a Schedule I to a Schedule III drug, a significant step in the process to legalize cannabis in the U.S. In April, we learned that the Florida Supreme Court will allow the state's voters to decide on the November ballot whether to legalize adult-use marijuana or not in the state of Florida.
DEA: A significant step in the process to legalize cannabis in the U S.
Speaker Change: Separately in April we learned of the Florida Supreme Court will allow the states voters to decide on the November ballot, well, they're legalized adult use marijuana or not in the state of Florida. These are good signs for our industry.
William Douglas Toler: These are good signs for our industry. While the financial metrics we just reported are central to this earnings call, I want to share a broader view of what I believe to be the beginning of a turn in the industry. I mentioned the five consecutive months of sequential sales growth. That's encouraging. But we're also seeing recent stabilization in our core U.S. business. Some of this is driven by innovation, like the previously mentioned PhotoBio LED lights.
Speaker Change: While the financial metrics. We just reported are central to this earnings call I want to share a broader view what I believe the beginning at the beginning of a turn in the industry.
Speaker Change: I mentioned, the five consecutive months of sequential sales growth that's encouraging but we're also seeing recent stabilization in our core U S business. Some of this is driven by innovation like the previously mentioned photodiode L. E D lights, and some of it is simply that supply and demand rebalancing across the country.
William Douglas Toler: And some of it's simply that supply and demand are rebalancing across the country. Proprietary brands, including Grotec, Roots Organic, Gaia Green, and Photovio, grew in Q1 compared to the prior year, coupled with slight improvement in demand. Our tight control and costs, including our adjusted SG&A being 24% lower in Q1 this year versus last, and we are well positioned for continued improvement and profitability We are reaffirming our full-year guidance for net sales, adjusted EBITDA, and free cash flow as we remain focused on our brands, diversification of revenue, and improved mix in controlling and reducing costs. With that, I'll turn it over to John to further discuss the details of Q1 and our outlook for 2024. John?
Speaker Change: Proprietary brands, including Great check roots organic Guy agreed and photo bio group Q1 compared to the prior year coupled.
Speaker Change: Coupled with slight improvement demand with our tight control on costs, including our adjusted SG&A being 24% lower in Q1 this year versus last and we are well positioned for continued improvement in profitability as volume returns.
John Lynch: We are reaffirming our full year guidance for net sales adjusted EBITDA and free cash flow as we remain focused on our brands diversification of revenue and improved mix in controlling and reducing cost with that I'll turn it over to John to further discuss the details of Q1 and our outlook for 2020 for John.
John Lindeman: Thanks, Bill, and good morning, everyone. Net sales for the first quarter were $54.2 million, down 12.9% year-over-year, driven primarily by a 12.6% decrease in volume mix. The decrease in volume mix was mainly related to oversupply in the cannabis industry. Additionally, pricing was relatively flat in Q1 as we lapped price concessions made in the first quarter of 2023. In the first quarter, consumable products represented approximately 76% of our sales compared to 72% in the first quarter of 2023.
John: Thanks, Thanks, Bill and good morning, everyone.
John: Net sales for the first quarter were $54 2 million down 12, 9% year over year, driven primarily by 12, 6% decrease in volume mix.
John: The decrease in volume mix was mainly related to oversupply in the cannabis industry.
John: Additionally, pricing was relatively flat in Q1, as we lap price concessions made in the first quarter of 2023.
John: In the first quarter consumable products represented approximately 76% of our sales compared to 72% in the first quarter of 2023.
John Lindeman: This higher mix of consumables was led by a year-over-year sales increase in Gromedia products, including our own proprietary Roots Organics and Gaia Green brands. During the quarter, we maintained a strong mix of proprietary brands at approximately 57% of our total net sales, relatively consistent with the same period last year.
Speaker Change: This higher mix of consumables was led by a year over year sales increase and grow media products, including our own proprietary roots organics and Guy Green brands during.
John: During the quarter, we maintained a strong mix of a primary brands at approximately 57% of our total net sales relatively consistent to the same period last year.
John Lindeman: Gross profit in the first quarter was $10.9 million compared to $11.4 million in the year-ago period; adjusted gross profit was $12.7 million, or 23.4% of net sales, compared to 14.1, or 22.6% of net sales. This 80 basis point increase is primarily the result of improved productivity inside our manufacturing plant. This marked our fifth consecutive quarter of year-over-year adjusted gross margin expansion.
John: Gross profit in the first quarter was $10 9 million compared to $11 4 million in the year ago period.
John: Adjusted gross profit was $12 7 million or 23, 4% of net sales compared to 14.1 or 22, 6% of net sales.
Speaker Change: It's 80 basis point increase was primarily the result of improved productivity inside of our manufacturing plants.
Speaker Change: This marked our fifth consecutive quarter of year over year adjusted gross margin expansion. While we are pleased with our progress we do feel there's some opportunity to further improve upon this metric as we track across the remainder of 2024.
John Lindeman: And while we are pleased with our progress, we do feel there's some opportunity to further improve upon this metric as we track across the remainder of 2024. Now, a quick update on our restructuring plan. As we previously mentioned, our second phase of restructuring was largely focused on right-sizing our manufacturing footprint, particularly with respect to durable equipment products.
Speaker Change: Now a quick update on our restructuring plan.
Speaker Change: As we previously mentioned our second phase of restructuring was largely focused on right sizing our manufacturing footprint.
Speaker Change: Typically with respect the durable equipment products.
John Lindeman: We announce today the signing of an agreement in which we are selling the manufacturing equipment and on-site inventory related to our IGE branded products for approximately $8.7 million in cash. As part of the transaction, we will no longer be responsible for carrying the heavy manufacturing labor and overhead costs or the investment in costly steel and aluminum necessary to build our high-quality IGE products. Instead, post-transaction, our new exclusive co-manufacturer will produce our IGE products, helping us to varyabilize our cost structure and ultimately improve our profit margin profile on this product. We are excited about the prospects for both Hydrofarm and our new exclusive co-manufacturer, with whom we expect to enjoy a close relationship going forward.
Speaker Change: We announced today the signing of an agreement, which we are selling the manufacturing equipment and on site inventory related to our E. G E branded products for approximately $8 7 million in cash.
Speaker Change: As part of the transaction, we will no longer be responsible for carrying the heavy manufacturing labor and overhead costs or the investment in costly steel aluminum necessary to build our high quality I G E products instead post transaction, our new exclusive co manufacturer will produce our AG products, helping us to variable lies.
Speaker Change: Our cost structure and ultimately improve our profit margin profile on this product set.
hydro farm: We are excited about the prospects for both hydro farm and our new exclusive co manufacturer with whom we expect to enjoy a close relationship going forward.
John Lindeman: We expect the transaction to close in the second quarter. Now, let me move on to our selling general administrative expense, which we dramatically reduced from the prior year period. In the first quarter, our SG&A expense was $19.6 million, compared to $24.4 million. Adjusted SG&A expenses were $12.3 million, a nearly a 24% reduction when compared to $16.2 million in the first quarter of 2023. This was primarily due to a reduction in facility expenses, professional fees, insurance costs, and headcount.
hydro farm: We expect the transaction to close in the second quarter.
Speaker Change: Now, let me move onto our selling general and administrative expense, which we've dramatically reduced from the prior year period.
Speaker Change: In the first quarter, our SG&A expense was $19 6 million compared to $24.4 million. Adjusted SG&A expenses were $12 3 million nearly a 24% reduction when compared to $16 2 million in the first quarter of 'twenty three.
Speaker Change: This was primarily due to a reduction in facility expenses professional fees insurance costs and head count.
John Lindeman: It is worth noting that much of this reduction is due to the cost we took out as part of our restructuring actions in the first half of 2023. Justin Iveda was $0.3 million in the first quarter compared to a loss of $2.1 million in the prior year period.
Speaker Change: It is worth noting that much of this reduction is due to the cost. We took out was part of our restructuring actions in the first half of 2023.
Speaker Change: Adjusted EBITDA was 0.3 million in the first quarter compared to a loss of $2 1 million in the prior year period.
John Lindeman: The $2.4 million improvement and the $400 basis point expansion in adjusted EBITDA margins were driven by our improved adjusted gross profit margins and our reduced adjusted SG&A expenses. We continue to demonstrate our ability to generate positive adjusted EBITDA, which is a testament to the effectiveness of our restructuring and cost-saving initiatives, along with our focus on proprietary brand sales. Moving on to our balance sheet and overall liquidity position, our cash balance as of March 31, 2024 was $24.2 million.
Speaker Change: The 2.4 million improvement in the 400 basis point expansion in adjusted EBITDA margin was driven by our improved adjusted gross profit margins and a reduced adjusted SG&A expenses.
Speaker Change: We continue to demonstrate our ability to generate positive adjusted EBITDA, which is a testament to the effectiveness of our restructuring and cost saving initiatives along with our focus on proprietary brand sales mess.
John Lindeman: We ended the first quarter with $120.5 million of term debt and approximately $130 million of total debt, inclusive of finance lease liability. Our net debt at the end of the quarter was approximately $106 million. As a reminder, our term loan facility has no financial maintenance covenant and does not mature until October 2028. We continue to maintain a zero balance on our revolving credit facility, and at this point, we have not borrowed against our revolver for nine straight quarters.
Speaker Change: Moving onto our balance sheet and overall liquidity position, our cash balance as of March 31, 2024 was $24 2 million.
Speaker Change: We ended the first quarter with $125 million of term debt and approximately $130 million of total debt inclusive of finance lease liabilities.
Speaker Change: Our net debt at the end of the quarter was approximately $106 million.
Speaker Change: As a reminder, our term loan facility has no financial maintenance Covenant and does not mature until October 2028.
Speaker Change: We continue to maintain a zero balance on our revolving credit facility and at this point, we have not borrowed against our revolver for nine straight quarters.
Operator: In the first quarter, we reported cash used in operating activities of $2.3 million, with capital expenses of $1.4 million, yielding a negative free cash flow of $3.7 million. I will remind you that the first quarter is a seasonally low period for our free cash flow, and we achieved a significant nearly $7 million improvement over the prior year period, which we accomplished through positive adjusted EBITDA and a disciplined reduction of inventories and working capital levels.
Speaker Change: In the first quarter reported cash used in operating activities of $2 3 million with capital expenditures of $1 4 million.
Speaker Change: Negative free cash flow of $3 7 million.
Speaker Change: I will remind you that the first quarter is a seasonally low period for our free cash flow and we achieved a significant nearly $7 million improvement from the prior year period, which we accomplished your positive adjusted EBITDA and disciplined reduction of inventories and working capital levels.
Operator: We remain on track to deliver our positive free cash flow guidance for the full year. With that, let me turn to our full year 2024 outlook. We are reaffirming our 2024 guidance, which includes net sales to decline, low to high teens on a percentage basis, adjusted EBITDA that is positive for the full year 2024, and lastly, positive free cash flow for the full year, which includes the continued expectation of four to five million of capital expenditures.
Speaker Change: We remain on track to deliver a positive free cash flow guidance for the full year.
Speaker Change: With that let me turn to our full year 2024 outlook. We are reaffirming our 2024 guidance, which includes net sales to decline low to high teens on a percentage basis. Adjusted EBITA that is positive for the full year 2024, and lastly positive free cash flow for the full year, which includes the continued expectation of.
Speaker Change: $4 million to $5 million of capital expenditures.
Operator: To wrap up, we remain on the right path and will continue to control what we can. We are operating profitably despite lower sales levels. Our restructuring plan and cost-saving initiatives have proven effective, and, as Bill discussed before, there are reasons for optimism on the demand side of our industry as we look ahead. We are excited about the future of this business, and we look forward to continued improvement throughout the year. Thank you all for joining us. We're happy to answer your questions now. Operator, please open the line.
Speaker Change: To wrap up we remain on the right path and we'll continue to control what we can.
Speaker Change: We are operating profitably despite lower sales levels, our restructuring plan and cost saving initiatives have proven effective and as bill discussed before there are reasons for optimism on the demand side of our industry as we look ahead.
Speaker Change: We are excited about the future of this business and we look forward to continued improvement throughout the year.
Speaker Change: You all for joining us and we're now happy to answer your questions. Operator, Please open the lines.
Speaker Change: Thank you Lady.
Operator: Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press the star and 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question is from the line of Peter Grom with UBS. Please go ahead.
Operator: Ladies and gentlemen, we will now be conducting a question and answer session. If you'd like to ask a question. Please press star and one on your telephone keypad.
Operator: Oh confirmation tone will indicate your line is in the question queue.
Operator: You May press star two if you'd like to remove your question from the queue.
Speaker Change: All participants using speaker equipment, it may be necessary to pick up your handset before pressing the stock east.
Speaker Change: Ladies and gentlemen, we will wait for a moment, while we poll for questions.
Speaker Change: Yeah.
Speaker Change: Our first question is from the line of Peter Grom with UBS. Please go ahead.
Peter K. Grom: Thanks, operator. Good morning, everyone. I hope you're doing well.
Peter K. Grom: Thanks, operator, and good morning, everyone.
Peter K. Grom: Hope Youre doing well maybe just.
Peter K. Grom: A couple of quick ones from me just first one on the guidance from a revenue perspective did you first of all can you maybe just remind us.
Peter K. Grom: Have misheard you, but did you you talked about some monthly improvements some of the best you can maybe just.
Speaker Change: Can you just repeat that for us.
Analyst: I'm, taking a bigger picture and looking at kind of the reported numbers here you've had some sequential improvement in sales trends over the last five quarters or so you started the year kind of at the better end of your topline guidance range.
Analyst: Maybe just help us understand what you're seeing from a topline progression or what you expect from a top line progression from here is there a reason that it can potentially step back from kind of this low double digit decline we saw at or should we expect sequential continued improvement and I guess within that or are you simply just kind of keeping this range to kind of be cautious.
Analyst: Given we're still very early in the year.
Peter K. Grom: No. Thanks, Peter and good question. So the first one for clarification, we've seen sequential improvements in revenue are really from last October through March so each month it stepped up just a bit.
William Douglas Toler: Maybe just a couple quick ones from me. First, on the guidance from the revenue perspective. Maybe first, Bill, could you maybe just remind us, I might have misheard you, but you talked about some monthly improvements, some of the best you've seen since the IPO. So maybe just, can you just repeat that for us? And then, taking a bigger picture and looking at kind of the reported numbers here, you've had some sequential improvement in sales trends over the last five quarters or so.
William Douglas Toler: You started the year kind of at the better end of your top line guidance range. Can you maybe just help us understand what you're seeing from a top line progression or what you expect from a top line progression from here? Is there a reason that it could potentially step back from kind of this low double-digit decline we saw, or should we expect? sequential continued improvement. And I guess within that, are you simply just kind of keeping this range to kind of be cautious, given we're still very early in the year?
William Douglas Toler: No, thanks, Peter, and good question. So the first one for clarification, we've seen sequential improvements in revenue really from last October through March. So each month it's stepped up just a bit from October through March. So that's five consecutive months there.
Peter K. Grom: October through March that's five consecutive months, there and that's the longest string of those since our IPO back in the end of 2020, which of course you remember so on that now the other question is around kind of guidance and we sort of or at the better end of the range now why not move it up there and what can we expect to see I think that's right.
William Douglas Toler: And that's the longest string of those since our IPO back in the end of 2020, which, of course, you remember. So on that, now the other questions around kind of guidance, and we sort of are at the better end of the range now. Why not move it up there, and what can we expect to see? I think that's where you're headed with that one.
Analyst: We're headed with that one.
William Douglas Toler: Then, we are being conservative here because it is early in the year. We think things are looking pretty good, but we also had, you know, a very large quarter last Q2. So we were lapping up against some big numbers there, and we just don't want to get ahead of ourselves. We've got such an important period here in really May, June, July, going through the kind of the core of the outdoor season and late spring, early summer stuff.
Analyst: <unk>.
Speaker Change: We are we are being conservative here. It is early in the year. We think things are looking pretty good but we also had you know a very large quarter last Q2. So we were lapping up against some big numbers, there and we just don't want to get ahead of ourself against such an important period here and really May June July.
Speaker Change: Going to the kind of the core of the of the outdoor season in late spring early summer stuff. We just really don't want to get ahead of ourselves and try and pick up numbers too quickly, we want to see that traction going on for.
William Douglas Toler: We just really don't want to get ahead of ourselves and try and take up numbers too quickly. We want to see that traction going on for, you know, a few more months and other things, but we are encouraged by recent trends. We're not overly, you know, giddy or optimistic yet, but we do think that things are certainly firming up, as you probably heard for some others. And we're seeing some overall sales trends that finished up Q1 and have even started Q2 that are encouraging for us as we go forward. But, much like you suggested, it is early in the year, and we don't want to get ahead of ourselves.
Speaker Change: A few more months to other things, but we are encouraged by recent trends we're not overly.
Didier: Didier optimistic yet, but we do think that things are are certainly firming up as you've probably heard for some others and we're seeing some overall sales trends that finished up Q1 and they've even started Q2 that are encouraging for us as we go forward, but much like you suggested it is early in the year, we don't want to get ahead of ourselves.
Peter K. Grom: Okay, that's helpful. And then I guess just on the asset sale announced this morning, can you maybe just remind us how big IG is? (inaudible)
Speaker Change: Okay. That's that's helpful and then I guess just.
Speaker Change: On the asset sale announced this morning can you maybe just remind us how big it is.
Speaker Change: As part of your kind of revenue mix and when you. When you talk about kind of the margin improvement as a result of this transaction is there anything you can kind of share in terms of the magnitude of improvement I'm just trying to understand.
Anna Kate Heller: How much you can really move the needle here. Thanks.
John Lindeman: Yeah, sure, Peter, I can jump in on that one. I mean, just in terms of magnitude, you know, today, as it sits, our IGE products are less than 10% of our total sales, somewhere closer to even almost 5% than 10. The magnitude is not that dramatic, but we did this because we do think it's a step that can continue to improve the profit margin on those particular products. As you'll recall, in the second half of last year, we did reduce and restructure that facility, the manufacturing facility outside Chicago.
Speaker Change: Yeah sure if he does I can jump in on that one I mean, just in terms of magnitude you know today is it sets our AG products are less than 10% of our total sales somewhere closer to even almost a 5% then in a downturn.
John Lindeman: So the magnitude is theres not that dramatic but we did this because we do think it's a step that can continue to improve the profit margin on those particular products as you'll recall in the second half of last year, we did reduce and restructure that facility the manufacturing facility outside of Chicago.
John Lindeman: We took it down from roughly 300,000 square feet to 200,000 square feet. We right-sized the staff and made some other improvements in the business. But even in spite of those changes, we're still not getting, at the kind of volumes we have today, we're still not getting the profitability we think we should on that business. This step really rectifies that, and the benefits should show through in the back half of this year.
Speaker Change: We took it down from like roughly 300000 square feet to 200000 square feet, we right sized the staff and made some other improvements in the business, but even in spite of those changes we're still not getting at the kind of volumes. We have today, we're still not getting the profitability. We think we should on that business. So.
This step this step really rectifies that benefits should show through in the back half of this year.
Peter K. Grom: Great, thanks so much. Best of luck. I'll pass it on.
Great. Thanks, so much best of luck I'll pass it on.
Peter K. Grom: Thanks Peter.
Operator: Thank you. Our next question is from the line of Andrew Carter with Stiefel. Please go ahead.
William Douglas Toler: Thank you.
John Lindeman: Our next question is from the line of Andrew Carter with Stifel. Please go ahead.
William Andrew Carter: Hey, thank you. Good morning.
William Andrew Carter: Hey, Thank you. Good morning, I guess first thing I wanted to ask is kind of within within the sale of I G. I know that last quarter, there was kind of a message either shrink to profitability.
William Andrew Carter: Or or grow I guess have you picked a firm path as I E signal that exactly and has kind of the landscaping or you're thinking about the world changed following hawthorne's announcement to partner with BFG.
Speaker Change: Okay.
William Douglas Toler: I guess the first thing I wanted to ask is kind of within the sale of IGE. I know that last quarter there was kind of a message: either shrink to profitability or grow. I guess, have you picked a firm path? Does IGE signal that exactly? And has the landscape or your thinking about the world changed following Hawthorne's announcement to partner with BFG?
John Lindeman: No not really I think I G is step that you know as John mentioned kind of assures more better profitability from that smaller business positions us really more cleanly now as a manufacturer of brands in the consumable space really gets us out of that durable peace I G. He was the only durable piece, we had it's not.
William Douglas Toler: No, not really. I think IGE is a step that, you know, as John mentioned, kind of assures better profitability from that smaller business, positions us really more cleanly now as a manufacturer of brands in the consumable space, and really gets us out of that durable piece. IGE was the only durable piece we had. It's not an area where we spend a lot of time or have a lot of synergy, so we don't, we didn't think being there was a good fit.
Speaker Change: An area, where we spend a lot of time or have a lot of synergy on them. So we don't.
William Douglas Toler: We didn't think being there was a good fit and also the.
William Douglas Toler: And also, the previous owner to whom we sold the assets back to, and it's important to recognize that we didn't sell the business back to him. We still own the brand. We still have the business. So, this should have little to no effect on our revenue through IGE and will improve our profit margin. So, back to your larger question, this does not sort of cast our direction in terms of either getting smaller or getting bigger.
John Lindeman: The previous owner, who we sold the assets back to and it's important to recognize we didn't sell that business back to him we still own the brand. We still have the business. This should have little or no effect on our revenue through a G and will improve our profit margin. So back to your larger question. This does not sort of.
William Douglas Toler: Cast our direction in terms of either getting smaller getting bigger. This is really just kind of a tactical step to clean up the portfolio and make us more focused on the consumables, where we're now doing 75% of our business in total or so so we still are looking for options to expand our footprint and to get.
William Douglas Toler: This is really just kind of a tactical step to clean up the portfolio and make us more focused on the consumables where we're now doing 75% of our business in total or so. But we still are looking for options to expand our footprint and to get kind of what I would call that, you know, hydroform 2.0, which we're not there yet. So, ideas out there include, you know, different kinds of combinations, different kinds of ideas. So, we're still working on that and know that that is an important step for us to be ready for the industry, which does feel like it's starting to strengthen a bit.
William Douglas Toler: What I would call that that hydro farm, two data, which we're not there yet so ideas out there include different kinds of combinations different kinds of ideas. So we're still working on that and know that that is an important step for us to be ready for the industry, which does feel like it's starting to strengthen a bit.
William Andrew Carter: Got it. And then I guess the second question is, the pricing looked pretty decent, at least compared to what Hawthorne reported and then kind of implied. In terms of the kind of promotional activity out there, where would you say that is right now? Are you foregoing any business? And I guess within that minus 12.6 volume mix decline, was there any portion of that that was purposeful, trading out a more profitable volume versus lower? I know that there was proprietary outperformed, but I'll just stop there. Thanks.
William Douglas Toler: Got it and then I guess the second question is the pricing looked pretty decent at least compared to what our Hawthorne reported and then kind of grow gen implied in terms of kind of the promotional activity out there would you say where would you say that is right. Now are you foregoing in the business and I guess within that minus 12 six volume.
William Andrew Carter: Mixed decline was there any portion of that that was purposeful trading out more profitable volume versus lower I know that there was proprietary out for them, but I'll just stop there. Thanks.
John Lindeman: Yeah, no, I don't think 12.6, a lot of it was intentional. I mean, I think it's just sort of continued conditions that we see in the industry. You know, the good news is obviously those declines have been improving as we've been marching across the calendar here for the last 18 months, so good news there. And then the pricing being relatively flat, Andrew, which you called out, really relates to price concessions we made in the first quarter last year and a little bit into the second quarter last year as well on some of our older technology lighting products, which we were really pushing the cell through during that period of So hopefully that all fits for you, does. Thanks, I'll pass it on.
Speaker Change: Yeah, No I don't think are the 12.6, a lot of it was intentional I mean, I think it's just sort of continue conditions that we see in the industry.
Andrew: The good news there is obviously those declines have been improving.
John Lindeman: As we've been marching across the calendar here last 18 months. So it's a good news there and then the pricing being relatively flat, Andrew which you called out really relates to price concessions. We made in the first quarter last year and a little bit into the second quarter of last year as well on some of our older technology lighting products, which.
John Lindeman: We were really pushing the sell through during that period of time, so hopefully that all fits for you.
William Andrew Carter: Thanks, I'll pass it on.
John Lindeman: It does thanks I'll pass it on.
William Andrew Carter: Thanks, Andrew.
William Andrew Carter: Thank you.
Operator: Our next question is from the line of Jesse Redmond with Water Tower Research. Please go ahead.
William Andrew Carter: Our next question is from the line of Jesse Redmen, but water Tower research. Please go ahead.
Jesse Redmond: Good morning, guys. Congratulations on the quarter.
Operator: Good morning, guys congratulations on the quarter I had a.
Jesse Redmond: Good luck to improving backup I had a question about the <unk>.
Jesse Redmond: I have a question about the improving macro environment that you referenced. You know, one of the big things going on is potentially finally seeing some political progress. Although you're not explicitly impacted by 280E removal, can you talk about how Schedule 3 may benefit your business and whether you expect to see the purse strings loosening at some of the bigger MSOs as they start to get more cash flow?
Jesse Redmond: Moving backwards environment that you referenced you know one of the big things going on as potentially finally, seeing some political progress, although you're not explicitly impacted by TUI to eat removal can you talk about how scheduled three may benefit your business and you can expect to see the purse strings. Some loosening of some of the some of your bigger msos as they start to get more cash flow.
Jesse Redmond: Yeah.
William Douglas Toler: Yeah, I think that, you know, there are numbers out there that say there could be up to a couple of billion dollars that used to be paid in taxes that can now be reinvested back into the industry. And obviously, that's kind of good news for everybody, right? And we can all go out and fight for our share of that.
Speaker Change: Yeah, I think that you know there are numbers out there that say that there could be up to a couple of billion dollars that used to be paid in taxes that now can be reinvested back in the industry and obviously thats kind of a good news for everybody right and we all can you go out and fight for our share of that so that's the impact that we expect which is terrific, but the reality is this is still a long.
William Douglas Toler: So, that's the impact that we expect, which is terrific. But the reality is, this is still a long process, right? It's still not been recommended, then there's going to be hearings, and there's going to be this, there's going to be that. All this stuff is going to take time. And I think that it's important to recognize that we're focused on operating today and finding the right solution for our company today. And all those things will happen down the road, we believe.
William Douglas Toler: Process right. It's still now been recommended then they're just gonna be hearings and theres going to be this doesn't mean that all of this stuff is going to take time and I think that it's important.
William Douglas Toler: To recognize that we're focused on operating today and finding the right solution for our company today and all of those things will happen down the road we believe.
William Douglas Toler: But we're not sitting around waiting for the government to solve our problems or the government to fix our business. We're making sure that we're operating profitably and figuring out the right long-term solution for Hydrofarm as these things get implemented over the next, you know, let's call it, 6, 12, 18, 24 months.
Speaker Change: But we're not sitting around waiting for the government to solve our problems are the government to fix our business, we're making sure that we're operating profitably and figuring out the right long term solution for hydro form as these things get implemented over the next let's call. It 612, 18 24 months.
William Douglas Toler: My second question is at the state level, we obviously have some good opportunities ahead of us with potentially Florida and maybe Pennsylvania, but this summer, we have Ohio rolling out, which is happening more quickly and in a manner that looks like it should be a pretty good market for most operators. Can you talk a little bit about Ohio and what that market potentially represents for you? Yeah, Ohio has started to show some volume.
William Douglas Toler: And my second question is is that the state level are we obviously have some good opportunities ahead of us with potentially Florida, and maybe Pennsylvania, but this summer we have Ohio rule of gout, which is happening more quickly than in the manner that looks like it should be a pretty a pretty pretty good market for most operators can you talk a little bit about o'hare.
William Douglas Toler: Oh, and what that market potentially represents for you.
William Douglas Toler: Yeah Ohio has started to show some some vibrance and we're growing you know very nicely on a small base in Ohio just as we are in Florida and some of the other rollout states like Missouri and other places so we're we are seeing that start to pick into the industry which is really encouraging. The other thing we're seeing across the pond if you will is with Germany passing 90 million people that are very cannabis friendly and it's a highly consumed product in Germany we are well positioned over there with all of our brands we've rolled out we had a business in in Spain that's positioned across all of Europe for a number of years so we are moving resources and people and assets into Germany to be ready to take advantage of that and importantly the way that Germany laws work it's going to be a very favorable home market it's not going to be driven by LPs or MSOs or large entities can be driven much more by the at-home grower which is a terrific thing for you know company like ours and brands that people can use at home and know and trust and so we think that while there's some states that are popping here in the US they're showing some nice vibrance we also think that the Germany opportunity really opens us up to you know call it another hundred million consumers if you will of people that are very cannabis friendly and a culture that we think is going to be right for us to grow in.
William Douglas Toler: Yeah, Ohio has started to show some some vibrance and we're growing.
William Douglas Toler: Very nicely on a small base in Ohio, just as we are in Florida, and some of the other Rollouts states like Missouri and other places. So we are we are seeing that start to pick into the industry, which is really encouraging. The other thing we're seeing across the pond. If you will is with Germany, passing 90 million people that are very cannabis friendly and it's a highly consumed product in <unk>.
William Douglas Toler: Germany, we are well positioned over there with all of our brands. We've rolled out we had a business and in Spain, that's positioned across all of Europe for a number of years. So we are moving resources and people and assets into Germany to be ready to take advantage of that and importantly, the the way the Germany laws work, it's going to be a very favorable home.
William Douglas Toler: The market, it's not going to be driven by Lps or msos are large entities can be driven much more by the at home grow or which is a terrific thing for a company like ours brands that people can use at home and know and trust and so we think that while there are some states that are popping here in the U S are showing some nice vibrance. We also think that the Germany opportunity really opens.
William Douglas Toler: That's up to you know.
William Douglas Toler: Call. It another 100 million consumers. If you will of people that are very cannabis friendly and a culture that we think is going to be right for us to grow in.
William Douglas Toler: Great I appreciate the comments thank you.
William Douglas Toler: Thank you Jesse.
William Douglas Toler: Thank you.
Operator: Ladies and gentlemen, as there are no further questions, I now hand the conference over to Bill Toler for his closing comments. Bill?
William Douglas Toler: Ladies and gentlemen, as there are no further questions I now hand, the conference over to Bill Taylor for his closing comments Bill.
William Douglas Toler: Thank you, Ryan, and thank you, everyone, for supporting and following Hydrofarm. We look forward to further updates through the summer and hope everyone's doing well. Thanks so much.
William Douglas Toler: Thank you Ryan and thank you everyone for supporting following Hydro farm, we look forward to further updates through the summer.
William Douglas Toler: If everyone's doing well thanks, so much.
Operator: Thank you. The conference of Hydrofarm Holdings Group has now concluded. Thank you for your participation. You may now disconnect your line.
Speaker Change: Thank you the conference of Hydro form Holdings Group has now concluded. Thank you for your participation you may now disconnect your lines.
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