Q3 2024 Hydrofarm Holdings Group Inc Earnings Call

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Speaker Change: Please stand by, your program is about to begin. If you need audio assistance during today's program, please press star zero.

Speaker Change: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the HydroFarm third quarter earnings 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, November 7, 2024. I would now like to turn the call over to Anna Kate Heller at ICR to begin.

Speaker Change: Thank you and good morning with me on the call today is bill Toler hydrocarbons, Chairman and Chief Executive Officer, and John London, and the company's Chief Financial Officer by now everyone should have access to our third quarter 'twenty 'twenty four earnings release and form 8-K issued this morning as long as an investor presentation available for reference. These documents are available on the investors tab.

Thank you and good morning. With me on the call today is Bill Toler, HydroFarm's Chairman and Chief Executive Officer, and John Lindeman, the company's Chief Financial Officer.

Speaker Change: By now, everyone should have access to our third quarter 2024 earnings release and Form 8K issued this morning, as well as an investor presentation available for reference.

Speaker Change: Jim Hydrophones website, I tied you find 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 them.

Speaker Change: These documents are available on the Investors section of Hydrofarm's website at hydrofarm.com.

Speaker Change: Before we begin our formal remarks, please know that our discussion today will include forward-looking statements.

Speaker Change: These forelooking 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.

Speaker Change: Payments are also subject to numerous restaurant uncertainties that could cause actual results to differ materially from our current expectations. We have for all of you 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 condition.

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 condition.

Speaker Change: 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 Taylor.

Lastly, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance.

Speaker Change: The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAP and reconciliations to comparable GAP measures are available in our earnings release. With that, I would like to turn the call over to Bill Toler.

Bill Toler: Thank you Kate and good morning, everyone in the third quarter, we achieved solid year on year improvements in our gross profit margin and adjusted gross profit margin our continuing focus on our proprietary brands is yielding results as they have increased as a percentage of our net sales both in the quarter and year to date, providing a boost for.

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

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

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

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

Speaker Change: Our net sales were seasonally weaker for us as industry challenges remain and we have seen several large retailers closed stores.

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

Speaker Change: That said, we remain on track to hit our full year outlook on our key metrics I'd now like to cover a number of the other bright spots in the third quarter.

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

Speaker Change: We saw strong performances from select proprietary consumable brands and to grow media nutrient category, specifically in the quarter. We saw repeat achieved significant year over year growth, while several of our key proprietary nutrient brands had solid results on.

Speaker Change: Specifically, in the quarter, we saw Aurora peat achieve significant year-over-year growth, while several of our key proprietary nutrient brands had solid results. On the durable side, we saw good performances on our proprietary Active Aqua and our Photobio lighting brand.

Speaker Change: On the durable side, we saw good performances on our proprietary active aqua and our photo by lighting brand.

Speaker Change: We will continue to strategically invest behind our key proprietary brands as we look to meet growers' evolving needs.

Speaker Change: We will continue to strategically invest behind our key proprietary brands as we look to meet growers evolving needs.

Speaker Change: Last quarter, we announced the distribution relationships or new distribution relationships with several partner brands, including Questor Humidifiers Hurricane fans and mills nutrients. These new partner brands added to our topline in the third quarter. However, they did weigh a bit on our cash flow in the period.

Speaker Change: Last quarter we announced the distribution relationships or new distribution relationships with several partner brands including Quest de humidifiers

Hurricane Fans and Mills Nutrients.

Speaker Change: These new partner brands added to our top line in the third quarter. However, they did weigh a bit on our cash flow in the period We remain optimistic about future performance for these partner brands, but we'll balance the upside of more sales with the inventory investment

Speaker Change: We remain optimistic about future performance for these partner brands, but we'll balance the upside if more sales with the inventory investment.

Speaker Change: We also saw progress in the diversification of our revenue sources, we continue to expand our international presence outside of the U S and Canada and continue to seek ways to drive non cannabis sales, including CA products sold into food floor lawn and garden and certain other customer channels as a percentage of sales our non cannabis.

Speaker Change: We also saw progress in the diversification of our revenue sources. We continue to expand our international presence outside of the U.S. and Canada and continue to seek ways to drive non-cannabis sales, including CEA products sold into food, floral, lawn and garden, and certain other customer channels.

Speaker Change: As the percentage of sales are non-cannabis and non-U.S.-Canada, revenue sources increased several hundred basis points compared to Q3 last year. We are finding ways to become more diverse and less reliant on cannabis in the U.S. and Canada.

Speaker Change: Non U S. Canada revenue sources increased several hundred basis points compared to Q3 last year, we are finding ways to become more diverse and less reliance on cannabis in the U S and Canada and we expect these revenue sources to be a greater percentage of sales this year than they were in 2023.

Speaker Change: And we expect these revenue sources to be a greater percentage of sales this year than they were in 2023.

Speaker Change: Improving profitability remains a top priority and we took more steps in the third quarter to integrate consolidate and optimize our manufacturing footprint as we drive productivity and cost efficiencies where possible.

Speaker Change: Improving profitability remains a top priority and we took more steps in the third quarter to integrate, consolidate, and optimize our manufacturing footprint as we drive productivity and cost efficiencies where possible.

Speaker Change: Notably since the beginning of 2023, we have now reduced our manufacturing footprint by nearly 60% and have reduced our total manufacturing and distribution space by almost 45%.

Speaker Change: Notably, since the beginning of 2023, we have now reduced our manufacturing footprint by nearly 60% and have reduced our total manufacturing and distribution space by almost 45%.

Speaker Change: Our actions have enhanced profitability and efficiency throughout our operations and we have completely these initiatives, while maintaining excellent customer service on time deliveries and a customer centric distribution footprint.

Speaker Change: Our actions have enhanced profitability and efficiency throughout our operations and we have completed these initiatives while maintaining excellent customer service, on-time deliveries, and a customer-centric distribution footprint.

Speaker Change: A testament to the fact effectiveness of our cost savings and restructuring initiatives. We have now realized six consecutive quarters of adjusted gross profit margins at or above 23% and nine consecutive quarters of meaningful year on year, adjusted SG&A savings and our absolute adjusted SG&A dollar cost.

Speaker Change: <unk> is below our pre IPO lot level.

Speaker Change: We also achieved an increase in adjusted EBITDA for the nine months year to date.

Speaker Change: A quick update on the state of the industry. We continue to operate in a challenging environment as you move into the last quarter of 'twenty 'twenty four with that said there are some positive indicators, including actual growth in monthly cannabis users the amount of actual canvas being concerned that continues across the country, which is encouraging.

Speaker Change: According to 2023 National survey nearly 70% of adults consider cannabis is readily available which is up significantly this indicates a great runway or a massive runway for the future of our industry.

Speaker Change: One other source of encouragement continues to be the progressing regulatory environments U S. Cannabis growers. The DEA has scheduled a hearing on December 2nd regarding their proposed reclassification of cannabis from schedule one schedule III.

Speaker Change: That's helpful. Thanks, and finally, congratulations on the continued cost controls can you talk a little bit about how we might be thinking about SG&A moving forward in 'twenty five how much more room you have to cut there.

Speaker Change: Yeah, Thanks, Jesse I'll jump in on that one yes, there is a little bit more room, I mean look we've I think proven over time now that we find ways to.

Speaker Change: Nip and tuck, where we can to.

Speaker Change: Continue to bring that down I mean, we are at pre IPO levels as Bill mentioned.