Q4 2024 Hydrofarm Holdings Group Inc Earnings Call
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Good day, ladies and gentlemen, and thank you for standing by and welcome to the Hydro firm Holdings group fourth quarter and fiscal year 2024 earnings Conference call. 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 March 5th 2020.
Operator: Welcome to the Hydrofarm Holdings Group Fourth Quarter and Fiscal Year 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.
Operator: Please note that this conference is being recorded today, March 5th, 2025.
Anna Kate Heller: I would now like to turn the call over to Anna Kate Heller at ICR to begin. Please go ahead. Thank you and good morning. With me on the call today is John Lindeman, Hydrofarm's Chief Executive Officer, and Kevin O'Brien, the company's Chief Financial Officer. Bill Toler, Executive Chairman of the Board, is also on the call.
Heller: I would now like to turn the call over to indicate Heller at ICR to begin. Please go ahead.
John Lindemann: Thank you and good morning with me on the call today is John Lindemann Hydropower, Chief Executive Officer, and Kevin O'brien is the company's Chief Financial Officer, Bill Kohler Executive Chairman of the Board is also on the call by now everyone should have access to our fourth quarter and full year 2024 earnings release and form eight.
Anna Kate Heller: By now, everyone should have access to our fourth quarter and full year 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.
Heller: K issued this morning, as well as an investor presentation available for reference.
Heller: Documents are available on the investors section of Hydrophones website at Www Dot hydropower and dotcom.
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 guaranteed the 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 conditions.
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 are for.
Heller: For all of you to our recent SEC filings for more detailed discussion of other risks that could impact our future operating results and financial condition. Lastly, during today's call. We will discuss non-GAAP measures, which we believe can be useful in evaluating our performance.
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.
John Lindemann: All of this additional information should not be considered in isolation or the substitute for results varied 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 John loved about it.
Anna Kate Heller: With that, I would like to turn the call over to John Lindeman. Thank you, Anna-Kate. Good morning, everyone.
Heller: Yeah.
Speaker Change: You indicate good morning, everyone I'm pleased to be speaking with you on my first call on the capacity of CEO transition that occurred on January 1st of this year.
John Lindeman: I'm pleased to be speaking with you on my first call in the capacity of CEO, the transition that occurred on January 1st of this year. Before I begin, I want to thank Bill for his leadership over the past 5 years and his continued support in his role as Executive Chair. Now, let me begin by stating that we made some notable improvements across the business in 2024, though the benefits from some of these improvements were masked by a challenging second half, particularly in the fourth quarter. Industry conditions weakened in the second half of 2024, marked by persistent oversupply challenges and further retail store closings across the sector.
Speaker Change: Before I begin I want to thank bill for his leadership over the past five years and his continued support in his role as executive Chairman.
Speaker Change: Now, let me begin by stating that we made some notable improvements across the business in 2024.
Speaker Change: It's from some of these improvements were masked by a challenging second half, particularly in the fourth quarter <unk>.
Speaker Change: Industry conditions weakened in the second half of 'twenty 'twenty four marked by persistent oversupply challenges and further retail store closings across the sector.
John Lindeman: This has resulted in lower sales across the supply chain, a trend we are seeing echoed across our industry peers. That said, I'm pleased to report that we finished the year with sales comfortably within our full year outlook and successfully completed reductions in adjusted SG&A through our effective cost saving and restructuring act. Having said that, our 2024 adjusted EBITDA and free cash flow fell short of guidance, due primarily to our fourth quarter performance. While it is seasonally our smallest quarter, fourth quarter sales came in softer than expected due to industry conditions. For quite some time, we have been clear that our strategic priority is driving the sales of our higher margin proprietary brands.
Speaker Change: This has resulted in lower sales across the supply chain a trend we are seeing echoed across our industry peers.
Speaker Change: That said I'm pleased to report that we finished the year with sales comfortably within our full year outlook and successfully completed the reductions in adjusted SG&A through our effective cost saving and restructuring actions.
Speaker Change: Having said that our 2020 for adjusted EBITDA and free cash flow fell short of guidance due primarily to our fourth quarter performance.
It is seasonally our smallest quarter fourth quarter sales came in softer than expected due to industry conditions.
Speaker Change: For quite some time, we have been clear that our strategic priority is driving the sales of our higher margin proprietary brands.
John Lindeman: This strategy has yielded positive results as we have improved our proprietary brand sales mix from approximately 35% in 2020 to 56% in 2024. This strategy has allowed us to operate profitably for the majority of quarters over the past two years, even as industry sales levels have compressed. In October and November, we saw our proprietary sales mix slip, which significantly pressured our profitability for the quarter and impacted our full year results. As we detailed on previous calls, we invested in multiple new distributed brands. primarily in the spring of 2024 in an effort to position our product portfolio for growth.
Speaker Change: This strategy has yielded positive results as we have improved our proprietary brand sales mix from approximately 35% in 2020% to 56% in 2024.
Speaker Change: This strategy has allowed us to operate profitably for the majority of quarters over the past few years, even as industry sales levels have compressed.
Speaker Change: In October and November we saw our proprietary sales mixed slip, which significantly pressured our profitability for the quarter and impacted our full year results as.
Speaker Change: As we detailed on previous calls we invested in multiple new distributed brands.
Speaker Change: Primarily in the spring of 2024, and an effort to position our product portfolio for growth.
John Lindeman: While our investment into these distributed brand partnerships helped our top line, they did weigh on our adjusted gross profit margin and free cash flow for the full year. We've since taken a number of actions to reemphasize our proprietary brand focus across the Hydrofarm platform and are now expecting an improvement in proprietary brand mix for the full year 2025.
Speaker Change: While our investment into these distributed brand partnerships helped our topline they did weigh on our adjusted gross profit margin and free cash flow for the full year.
Speaker Change: We have since taken a number of actions to reemphasize, our proprietary brand focus across the hydrophone platform and are now expecting an improvement in proprietary brand mix for the full year 2025.
John Lindeman: There were a number of positive developments in 2024 that we intend to further build upon this year. For example, in 2024, we saw strong performances from select proprietary consumable brands in the Grow Media and Nutrient category. Specifically, full year results for our RRP brand remain steady and proved again to be one of our most consistent brands. In addition, several of our other key proprietary consumer brands also had relatively strong year-on-year results. On the durable side, we saw outperformance from our proprietary Active Aqua brand. As I have mentioned, we are deeply focused on our proprietary offerings and will continue to strategically invest behind our key brands as we look to meet growers' evolving needs.
Speaker Change: There were a number of positive developments in 2024 that we intend to further build upon this year.
Speaker Change: For example in 2024, we saw strong performances from select proprietary consumable brands in the grow media and nutrient categories.
Speaker Change: Specifically full year results for our raw Bran remained steady improved again to be one of our most consistent brands.
Speaker Change: In addition, several of our other key proprietary consumable brands also had relatively strong year on year results.
Speaker Change: On the durable side, we saw outperformance from our proprietary active Aqua brand.
Speaker Change: As I have mentioned, we are deeply focused on our proprietary offerings and will continue to strategically invest behind our key brands as we look to meet growers' evolving needs.
John Lindeman: We also will continue to innovate and evolve our portfolio and have a number of exciting new proprietary products on the docket for 2025. We also were encouraged by our e-commerce business in 2024 as U.S. sales for this channel increased over 25 percent. eCommerce has become a strong channel for home growing solutions and we are committed to expand our presence and our capabilities in this space. Another area of focus has been to increase overall revenue diversity to help balance industry fluctuation. And in 2024, we achieved a nearly 200 basis point increase in our sales to non-cannabis and non-U.S.
Speaker Change: We also will continue to innovate and evolve our portfolio and have a number of exciting new proprietary products on the docket for 2025.
Speaker Change: We also are encouraged by our e-commerce business in 2024 as U S sales for this channel increased over 25%.
Speaker Change: E Commerce has become a strong channel for homegrown solutions, and we are committed to expand our presence and our capabilities in this space.
Speaker Change: Another area of focus has been to increase overall revenue diversity to help balance industry fluctuations.
Speaker Change: And then 'twenty 'twenty four we achieved a nearly 200 basis point increase in our sales to non candidates and non U S Canadian customers.
John Lindeman: Canadian customers. In 2025, we are planning to introduce several new products outside of the U.S. and Canada. As a result of this action and others, we expect to further increase our non-cannabis and non-US-Canadian sales mix again this year. Improving profitability by improving the efficiency of our manufacturing and distribution operations and by reducing our adjusted SG&A expense continues to be a top priority. While our profitability took a step back in the fourth quarter, we should not discount the significant progress we have made the past couple of years in several key areas. Since the beginning of 2023, we reduced our manufacturing footprint by nearly 60% and invested behind productivity-enhancing capital equipment in our manufacturing operations.
Speaker Change: In 2025, we are planning to introduce several new products outside of the U S and Canada.
As a result of this action and others, we expect to further increase our non cannabis and non U S. Canadian sales mix again this year.
Speaker Change: Improving profitability by improving the efficiency of our manufacturing and distribution operations and by reducing our adjusted SG&A expense continues to be a top priority.
Speaker Change: While our profitability took a step back in the fourth quarter, we should not discount the significant progress we have made the past couple of years in several key areas.
Speaker Change: Since the beginning of 2023 reduced our manufacturing footprint by nearly 60% and invested behind productivity enhancing capital equipment in our manufacturing operations.
John Lindeman: We also deliver 10 consecutive quarters of meaningful year-on-year adjusted SG&A savings and are now operating below our pre-IPO dollar cost.
Speaker Change: We also delivered 10 consecutive quarters of meaningful year over year adjusted SG&A savings.
Speaker Change: Now operating below our pre IPO dollar cost.
John Lindeman: Looking ahead to 2025, we have a clear strategic roadmap focused on driving diverse, high-quality revenue streams. Improving our profit margins, managing our financial position, and continuing to improve our overall capability. This starts with reinvigorating our proprietary brand sales mix through targeted marketing investments, enhanced sales force capabilities, refined incentive structures and additional sales support. To enhance our profit margins, we will further optimize our distribution network to align with current sales volume and pursue contract manufacturing opportunities to maximize our production capacity. To further support margin enhancement, we will also reduce our SG&A expenses in several areas, including professional and outside services, facility costs, and insurance.
Speaker Change: Looking ahead to 2025, we have a clear strategic roadmap focused on driving diverse high quality revenue streams, improving our profit margins, managing our financial position and continuing to improve our overall capabilities.
Speaker Change: Starts with reinvigorating, our proprietary brand sales mix through targeted marketing investments enhanced salesforce capabilities refined incentive structures and additional sales support infrastructure.
Speaker Change: To enhance our profit margins, we will further optimize our distribution network to align with current sales volume and pursue contract manufacturing opportunities to maximize our production capacity.
Speaker Change: With regard to support margin enhancement, we will also reduce our SG&A expenses in several areas, including professional and outside services facility costs and insurance.
John Lindeman: Managing free cash flow and our overall financial position will remain a priority. We believe there is room for improvement in this area with tighter working capital management since ERP integrations are now complete and AP software automation is near. While we cannot be certain on the timing of an overall industry recovery, we are certain that we will manage these initiatives well.
Speaker Change: <unk> free cash flow and our overall financial position will remain a priority we.
Speaker Change: We believe there is room for improvement in this area with tighter working capital management since ERP integrations are now complete and AP software automation is near complete wild.
Speaker Change: While we cannot be certain on the timing of an overall industry recovery. We are certain that we will manage these initiatives.
John Lindeman: Lastly, before I turn it over to Kevin, I should reiterate that we also will focus on strategic alternatives that could enhance shareholder value. We continue to monitor the market for opportunities that serve to conform to our strategic priorities, complement our portfolio, and strengthen our business. This could be achieved either through a strategic combination or in the context of a potential acquisition or divestment.
Speaker Change: Lastly, before I turn it over to Kevin I should reiterate that we also will focus on strategic alternatives that could enhance shareholder value.
Speaker Change: We continue to monitor the market for opportunities that serve to conform to our strategic priorities complement our portfolio and strengthen our business. This.
Speaker Change: This could be achieved either through a strategic combination or in the context of a potential acquisition or divestiture.
Kevin O'Brien: With that, I'll hand it over to Kevin to further discuss the details of our fourth quarter financial results and our full year 2025 outlook. Thanks, John, and good morning, everyone.
Speaker Change: With that I'll hand, it over to Kevin to further discuss the details of our fourth quarter financial results and our full year 2025 outlook.
Kevin: Thanks, John and good morning, everyone I'm excited to be here on my first earnings call as CFO of Hydro farm.
Kevin O'Brien: I'm excited to be here on my first earnings call as CFO at Hydrofarm. Net sales for the fourth quarter were $37.3 million, down 20.9% year-over-year, driven primarily by a 16.8% decrease in volume mix and 3.9% decline in price. The decrease in volume mix was mainly related to an oversupply in the cannabis industry. As we had indicated last quarter, the pricing decline was driven largely by promotional activity in the period. As John discussed before, overall brand mix slipped during Q4. Our proprietary brands represented approximately 52% of our total net sales, but decreased compared to the prior year period.
Kevin: Net sales for the fourth quarter were $37 3 million down 29% year over year, driven primarily by a 16, 8% decrease in volume mix and three 9% decline in pricing.
Kevin: The decrease in volume mix was mainly related to an oversupply in the cannabis industry.
Kevin: As we had indicated last quarter.
Kevin: Pricing decline was driven largely by promotional activity in the period.
Kevin: As John discussed before overall brand mix slipped during Q4, our proprietary brands represented.
Kevin: 52% of our total net sales a decrease compared to the prior year period.
Kevin O'Brien: We started Q4 2024 with weaker proprietary brand mix performance compared to our expectations. As John noted, we began implementing several corrective actions and have achieved some recovery in proprietary brand mix over the past few months.
Kevin: We started Q4 2024 with weaker proprietary brand mix performance compared to our expectations.
As John noted, we began implementing several corrective actions and have achieved some recovery and proprietary brand mix over the past few months.
Kevin O'Brien: The negative impact on profitability made clear our strategic priorities for 2025. We are focused on driving performance of our higher margin, e-proprietary brands, and we'll be investing in them to approve this mix in 2025. For the fourth quarter and full year 2024, consumable products continued to account for approximately three quarters of our total sales, which was similar to 2023. Gross profit in the fourth quarter was $1.8 million or 4.9% of net sales compared to $8.4 million or 17.9% of net sales in the year-ago period. Adjusted gross profit was $3.6 million, or 9.6% of net sales, compared to $11.5 million, or 24.3% of net sales last year.
Kevin: The negative impact on profitability made clear our strategic priorities for 2025, we are focused on driving performance of our higher margin key proprietary brands and we'll be investing in them to approve this mix in 2025.
Kevin: For the fourth quarter and full year 2020 for consumable products continued to account for approximately three quarters of our total sales.
Kevin: Which was similar to 2023.
Kevin: Gross profit in the fourth quarter was $1 8 million or four 9% of net sales compared to $8 4 million or 17, 9% of net sales in the year ago period.
Kevin: Adjusted gross profit was $3 6 million or nine 6% of net sales compared to $11 5 million or 24, 3% of net sales last year.
Kevin O'Brien: The decrease was due to lower overall sales and a decreased mix of our higher-margin proprietary-branded sales in the quarter.
Kevin: The decrease was due to lower overall sales and a decreased mix of our higher margin proprietary branded sales in the quarter. We also incurred approximately $1 4 million of inventory related charges that were not associated with our restructuring plans.
Kevin O'Brien: We also incurred approximately $1.4 million of inventory-related charges that were not associated with our restructuring plan. During the fourth quarter, we substantially completed the second phase of our restructuring plan, which included significant reductions to our manufacturing and distribution center footprint. Our manufacturing operations are now concentrated in two U.S. locations, plus our Canadian peat moss harvesting and processing facility. We successfully integrated our Canadian entities into our main ERP system and reorganized business activities and reporting into a single operating segment effective in the fourth quarter. These integrations were important to reduce costs and are expected to improve operating efficiencies and drive synergy.
Kevin: During the fourth quarter, we substantially completed the second phase of our restructuring plan, which included significant reductions to our manufacturing and distribution center footprint.
Kevin: Our manufacturing operations are now concentrated in two U S locations, plus our Canadian peat Moss harvesting and processing facility.
Kevin: We successfully integrated our Canadian entities into our main ERP system, and reorganize business activities and reporting into a single operating segment effective in the fourth quarter.
Kevin: These integrations are important to reduce costs and are expected to improve operating efficiencies and drive synergies given the ongoing challenges in the industry. We will continue to evaluate opportunities to drive further efficiencies and cost reductions.
Kevin O'Brien: Given the ongoing challenges in the industry, we will continue to evaluate opportunities to drive further efficiencies and cost reduction.
Kevin O'Brien: Moving on to our Selling General and Administrative Expense. In the fourth quarter, our SG&A expense was $17 million compared to $19.9 million last year. Adjusted SG&A expenses were $10.8 million, a 10% reduction when compared to $12 million last year. For the full year, we achieved a 17% reduction in adjusted SG&A due to lower expenses in several areas, including facility expenses, headcount reductions, professional fees, and insurance costs. This marks 10 consecutive quarters of significant year-on-year adjusted SG&A savings, and we have line of sight into further cost savings in 2025, net of our plans to invest in proprietary brand markets.
Kevin: Moving onto our selling general and administrative expense.
Kevin: In the fourth quarter, our SG&A expense was $17 million compared to $19 9 million last year.
Kevin: Adjusted SG&A expenses were $10 8, million% to 10% reduction when compared to $12 million last year.
Kevin: For the full year, we achieved a 17% reduction in adjusted SG&A due to lower expenses in several areas, including facility expenses headcount reductions professional fees and insurance costs.
Kevin: This marks 10 consecutive quarters of significant year on year, adjusted SG&A savings and we have line of sight into further cost savings in 2025 net of our plans to invest in proprietary brand marketing.
Kevin O'Brien: As previously stated, in connection with our restructuring and related cost-saving initiatives, we significantly reduced our distribution center facility footprint through sub-lease and third-party logistics agreements for several of our U.S. and Canadian locations. In 2025, we will continue to review opportunities to reduce facility space and our overall inventory levels in connection with distribution center consolidation.
Kevin: As previously stated in connection with our restructuring and related cost saving initiatives, we significantly reduced our distribution center facility footprint through sublease and third party logistics agreements for several of our U S and Canadian locations.
Kevin: In 2025, we will continue to review opportunities to reduce facility space and our overall inventory levels in connection with distribution Center consolidations.
Kevin O'Brien: Adjusted EBITDA was a loss of $7.3 million in the fourth quarter. The loss was due to lower sales and adjusted gross profit, partially offset by adjusted SG&A.
Kevin: Adjusted EBITDA was a loss of $7 3 million in the fourth quarter. The loss was due to lower sales and adjusted gross profit, partially offset by adjusted SG&A savings.
Kevin O'Brien: Moving on to our balance sheet and overall liquidity. Our cash balance as of December 31st, 2024 was $26.1 million up from $24.4 million at the end of the third quarter. We ended the year with $119.3 million of term debt and approximately $128 million of total debt inclusive of financial lease liabilities. Our net debt at the end of the year was approximately $102 million. As a reminder, our term loan facility has no financial maintenance covenant and does not mature until October 2028. And we continue to maintain a zero balance on our revolving credit facility. With our cash on hand and approximately $13 million of availability on our untapped revolving line of credit, we have $39 million of total liquidity, a comfortable position for us.
Kevin: Moving onto our balance sheet and overall liquidity position our.
Kevin: Our cash balance as of December 31, 2024 was $26 1 million up from $24 4 million at the end of the third quarter.
Kevin: We ended the year with $119 3 million of term debt and approximately $128 million of total debt inclusive of financial lease liabilities are.
Kevin: Our net debt at the end of the year was approximately $102 million.
Kevin: As a reminder, our term loan facility has no financial maintenance Covenant and does not mature until October 2028.
And we continue to maintain a zero balance on our revolving credit facility.
Kevin: With our cash on hand, and approximately $13 million of availability on our untapped revolving line of credit we have $39 million of total liquidity a comfortable position for us.
Kevin O'Brien: In the fourth quarter, we generated cash flow from operating activities of $2.7 million and capital expenditures of $0.3 million, yielding free cash flow of $2.4 million.
Kevin: In the fourth quarter, we generated cash flow from operating activities of $2 7 million and capital expenditures of 0.3 million, yielding free cash flow of $2 4 million.
Kevin O'Brien: With that let me turn to our full year 2025 outlook. The outlook we are providing today is based on our current industry view for 2025. We expect net sales to decline between 10 and 20 percent compared to 2024 levels. We also expect an increase in adjusted gross profit margin, primarily due to improved proprietary brand mix and our restructuring and related cost savings initiatives. We expect Adjusted EVA to be negative, but an improvement compared to full year 2024. To accomplish improved Adjusted EVA on lower sales, we are assuming improvements in our proprietary brand mix and operational efficiencies, leading to higher Adjusted Gross Profit Marks.
Kevin: With that let me turn to our full year 2025 outlook. The outlook. We're providing today is based on our current industry view for 2025.
Kevin: We expect net sales to decline between 10, and 20% compared to 2024 levels. We also expect an increase in adjusted gross profit margin.
Kevin: Primarily due to improved proprietary brand mix and our restructuring and related cost savings initiatives.
Kevin: We expect adjusted EBITDA to be negative, but an improvement compared to full year 2024.
Kevin: <unk> improved adjusted EBITDA on lower sales, we are assuming improvements in our proprietary brand mix and operational efficiencies leading to higher adjusted gross profit margin.
Kevin O'Brien: We also anticipate further reducing our adjusted SG&A in 2025.
Kevin: We also anticipate further reducing our adjusted SG&A in 2025 as John noted we plan to make some targeted investments to drive sales. We are also assuming no significant charges related to non restructuring inventory write downs or accounts receivable for the full year.
Kevin O'Brien: As John noted, we plan to make some targeted investments to drive sales. We are also assuming no significant charges related to non-restructuring inventory write-downs or accounts receivable for the fully. Lastly, we believe we can continue to drive inventory reductions through our facility consolidations and improved execution on working capital management, generating an improvement in free cash flow compared to our 2024 level.
Kevin: Lastly, we believe we can continue to drive inventory reductions through our facility consolidations and improved execution on working capital management generating an improvement in free cash flow compared to our 2024 level.
Kevin O'Brien: To close, we remain optimistic about the long-term prospects for our industry and the future of hydro. In 2025, we will continue to invest behind our key higher-margin proprietary brands and further diversify our revenues. and better position ourselves for an eventual demand turnaround in the industry.
Kevin: To close we remain optimistic about the long term prospects for our industry and the future of hydrocarbons. In 2025, we will continue to invest behind our key higher margin proprietary brands and further diversify our revenue streams and better position ourselves for an eventual demand turnaround in the industry.
Operator: Thank you all for joining us, and we are now happy to answer any questions. Operator, please open up the line. Thank you so much. Ladies and gentlemen, at this time, if you would like to ask a question, please press the star 1 on your telephone keypads. You may withdraw yourself from the queue at any time by pressing star 2. Once again, to ask a question, that is star 1. We'll pause for a moment to allow the questions to enter the queue.
Kevin: Thank you all for joining us and we are now happy to answer any questions. Operator, Please open up the line.
Speaker Change: Thank you so much ladies and gentlemen at this time, if you would like to ask a question. Please press star one on your telephone Keypads you may withdraw yourself from the queue at any time by pressing star to once again to ask a question that is star one we'll pause for a moment to allow the questions to enter the queue.
Dimitri Silverstein: While we wait, we'll take our first question from Dimitri Silverstein from Water Tower Research. Please go ahead. Good morning, gentlemen. Thank you for taking my call, my question, I should say. You mentioned that a lot of your fourth quarter performance was driven by what's going on generally in the market and industry.
Speaker Change: Well, we will take our first question from Dmitry Silverstein from water Tower Research. Please go ahead.
Dmitry Silverstein: Good morning, gentlemen, thank you for taking my call My question I should say.
Dmitry Silverstein: You mentioned that a lot of your fourth quarter performance was driven by what's going on generally in the in the market and the industry can you talk a little bit more about the what the dynamics look like for the broader environment in your categories. As you look forward to 2025, and maybe provide some great granularity on when you think.
Dimitri Silverstein: Can you talk a little bit more about what the dynamics look like for the broader environment in your categories as you look forward to 2025? Maybe provide some granularity on when you think the oversupply in the channel will be worked off.
Dmitry Silverstein: The.
Dmitry Silverstein: The oversupply in the channel will be will be worked off.
John Lindeman: Good morning, Dimitri. Good morning, Dimitri, and thanks for joining. Yeah, sure. I think for starters, you need to look back to early last year in 2024. You know, there was a lot of optimism in the category about rescheduling happening, about Florida passing, about the Safer Banking Act, you know, kind of coming into its own finally. And that helped spur a lot of sequential improvement in spending for a period of time. Wasn't a lot, but it was sequential improvement from toward the end of 23 into the spring of 24. You know, as it became more clear that there was going to be a presidential administration change and then Florida not passing, I think expectations and timelines were reset or prolonged.
Dmitry Silverstein: Good morning, Mitch Good morning, Dmitry and thanks, Thanks for joining.
Speaker Change: Yes, sure. Thanks for Starz you'd need to look back to early last year. In 2024, there was a lot of optimism in the category about rescheduling happening.
Speaker Change: Florida, passing about safer banking Act.
Speaker Change: Kind of coming into its own finally, and that helped spur a lot of sequential improvement in spending for a period of time.
Speaker Change: It wasn't a lot, but it was sequential improvement from towards the end of 'twenty three into the spring of 'twenty four.
Speaker Change: As it became more clear that there was going to be a presidential administration change and then Florida, not passing I think expectations and timelines were reset or prolonged.
John Lindeman: We could see a return to growth in the second half of the year. You know, who knows, maybe increased U.S. border security will have some positive impact on U.S. cannabis pricing, which would be a good thing for growers. Harris are also a little bit of a wild card right now, at least for supplies coming from China, Canada, or maybe even Europe. We'll just have to see. As for our internal models, we're expecting double-digit sales declines early in the year that moderate as the year unfolds. You know, regardless, we will be focusing on our key initiatives that I mentioned earlier.
Speaker Change: We could see a return to growth in the second half of the year.
Speaker Change: Those maybe increased U S border security, we will have some positive impact on U S cannabis pricing, which would be a good thing for growers.
Speaker Change: Paris or also a little bit of a wildcard right now at least for supplies coming from China, Canada, or maybe even Europe.
Speaker Change: We will just have to see I mean.
Speaker Change: As for our internal models, we're expecting double digit sales declines early in the year that moderated as the year unfolds.
Speaker Change: Regardless, we will be focusing on our key initiatives that I mentioned earlier.
John Lindeman: We're going to focus on improving our proprietary brand mix, driving more diverse revenue streams both outside the U.S. and Canada and outside of the cannabis industry, improving our profit margins. We have an opportunity to further optimize our distribution center network. We could extract some decent savings there and the opportunity to drive more SG&A savings. Those things also certainly, both of those will have an opportunity to help our free cash flow. We also have an opportunity, we believe, to continue to manage down our inventory levels, given the current demand environment, and manage our working capital free cash flow.
Speaker Change: We're going to focus on improving our proprietary brand mix driving more diverse revenue streams, both outside the U S and Canada and outside of the cannabis industry proving our profit margins, we have an opportunity to further optimize our distribution Center network.
Speaker Change: Could could extract some decent savings there and the opportunity to drive more SG&A savings those things also certainly both of those will have an opportunity to help our free cash flow.
Speaker Change: We also have an opportunity we believe to continue to manage down our inventory levels given the current demand environment and manage our working capital free cash flow as you heard Kevin mentioned, we completed a few ERP integrations. This past year. It opens up and gives us a little bit a lot of better line of sight on some of our working capital in a way.
Dimitri Silverstein: As you heard Kevin mention, you know, we completed a few ERP integrations this past year. It opens up and gives us a little bit better line of sight on some of our working capital in a way that we think there's opportunity. So, in general, hopefully that helped to give you a little bit more perspective on then and now. It does. Thank you very much.
Speaker Change: We think theres opportunity.
Speaker Change: So in general hopefully that helps to give you a little bit more perspective on then and now.
Speaker Change: It does thank you very much I want to follow up if I may on your cost cutting initiatives.
John Lindeman: I want to follow up, if I may, on your cost-cutting initiatives. You talked about rationalizing your manufacturing infrastructure and your warehouse and distribution, the cost savings that you're getting out of ESG&A, thanks to the ERP going live. What can we look forward to in 2025 in terms of incremental benefits of the actions that you've taken? And how much more can you improve your operations and improve your efficiencies as you move through 2025? Yeah, great question. Yeah, I mean, look, there's an opportunity for sure to continue to extract some additional savings, and we have a series of actions lined up, you know, I would say, you know, certainly I mentioned earlier, but optimizing our DC network further is something we could do, and we could do it a couple different ways, you know, we can expand our subleased 3PL relationships or add new ones to effectively reduce our already actively operated space and reduce our net facility costs.
Speaker Change: Talked about rationalizing your manufacturing infrastructure in your warehouse and distribution.
Speaker Change: The cost savings that youre getting out of the SG&A. Thanks to the ERP going live what can we look forward to.
Speaker Change: In 2025 in terms of incremental benefits of the actions that you've taken how much more can you.
Speaker Change: Improve your operations and improve your efficiencies as you move through 2025.
Speaker Change: Yes, Great question, Yes, I mean look there's an opportunity for sure.
Speaker Change: To continue to extract some additional savings and we have a series of actions lined up.
Speaker Change: Say.
Speaker Change: Certainly I mentioned it earlier, but optimizing our DC network further something we could do and can do it a couple of different ways. We can expand our sublease three P L relationships or add new ones to effectively reduce our already act.
Speaker Change: <unk> operated space and reduce our net facility costs.
John Lindeman: You know, we may have an opportunity to completely consolidate one or more of our DCs into other DCs. We've done that once before. We actually saw really good inventory level savings by affecting that trade. And so we're looking at both of these options right now. and B, there's an opportunity in front of us, perhaps in the Western US. There's also an opportunity to further reduce our SG&A costs. I mean, we've taken a lot out already, to be fair, but we do have a lot of site currently on over two to $3 million savings, and we think there's opportunity.
Speaker Change: We may have an opportunity to completely consolidate one or more of our dcs into other D. C. We've done that once before we actually saw really good.
Speaker Change: Inventory level savings by affecting that trade.
Speaker Change: And so we're looking at both of these options right now.
Speaker Change: And there's an opportunity in front of us perhaps in the Western U S.
Speaker Change: Also an opportunity to further reduce our SG&A cost I mean, we've taken a lot out already to be fair, but we do have line of sight currently over $2 million to $3 million savings and we think there's opportunity for more.
John Lindeman: You know, lastly, maybe on this point is, you know, within our working manufacturing centers. You know, we also have an opportunity to get some lap benefit from productivity initiatives that went into place last year. Now, remember, we consolidated 2 manufacturing facilities, actually 3. Into, you know, the remaining 2 here in the US around mid year last year, and then we still have our facility up in Canada. Now, some of those benefits may be masked by, you know, just depending on how much demand pull through, we ultimately get this year, but our models do suggest that if we hit sort of the mid favorable end of our range, we should see some manufacturing benefit this year.
Speaker Change: Lastly, maybe on this point as you know.
Speaker Change: Within our working manufacturing centers.
Speaker Change: We also have an opportunity to get some lag benefit from productivity initiatives that went into place last year.
Speaker Change: Remember, we consolidated two manufacturing facilities actually three into.
Speaker Change: The remaining two here in the U S around mid year last year, and then we still have our facility up in Canada.
Speaker Change: Some of those benefits may be massed by just depending on how much demand pull through we ultimately get this year.
Speaker Change: <unk> suggests that if we hit sort of the mid favorable end of our range, we should see some manufacturing benefit this year too.
John Lindeman: So in and also in light, you know, of the things I mentioned on working capital, you know, consolidating these fees just to underscore that really do have a positive impact on our inventory reductions. And so, you know, good opportunity from a working capital standpoint there.
Speaker Change: So in and also in light of the things I mentioned on working capital consolidated Dcs just to underscore that really do have a positive impact on our inventory reductions so good opportunity from a working capital standpoint there.
Dimitri Silverstein: I think those are the main points, I think. That's helpful. Thank you for that.
Speaker Change: I think those are the main points I think.
Speaker Change: That's helpful. Thank you for that.
Dimitri Silverstein: If I can ask maybe a kind of a 30,000 foot view question, you know, investors in many industries are concerned or at least talking about the potential impact of tariffs, whether already announced or potentially announced. We also have, obviously, you mentioned the new administration, new HHS secretary, that this focus on cutting regulations and perhaps doing something with the classification of cannabis. If you look at sort of these things that are beyond your control, but do you have a view on how this may impact you either positively or negatively, whether the industry overall or you specifically?
Speaker Change: Can I ask maybe kind of a 30000 foot view question.
Speaker Change: Investors.
Speaker Change: Many industries are concerned or at least talking about the potential impact of tariffs with our already announced or potentially announced we also have obviously you mentioned the new administration UHF Secretary.
Speaker Change: This focus on quality regulations.
Speaker Change: Perhaps doing something with the classification.
Speaker Change: Cannabis.
Speaker Change: If you look at sort of the these things that are beyond your control, but do you have a view on how this may impact you either positively or negatively whether the industry overall use specifically.
John Lindeman: Yeah, sure. I mean, for sure, there's a lot of moving parts in tariffs these days, but I totally get that it's on investors' minds. It's on our mind, right? I mean, we've got a lot of things in place that we're working on against this. I would say, first, it's important to kind of understand the historical balance of trade for us here at Hydrofarm. Between the U.S. and Canada, we actually send some product up into Canada, and we receive some product in the United States that's reciprocal from Canada. But When you match those two together, we're effectively a net importer from Canada.
Speaker Change: Yes, sure I mean for sure there is a lot of moving parts in the tariffs these days, but I totally get that it's on investors' minds. It's on our mind Alright, I mean, we've got a lot of things in place that we're working on against Us.
Speaker Change: Say first it's important to kind of understand the historical balance of trade for us here at Heidelberg.
Speaker Change: Between the U S and Canada.
Speaker Change: We actually send some product up into Canada, and we receive some product in the United States.
Speaker Change: Reciprocal from Canada, but.
Speaker Change: When you match those two together, we're effectively a net importer from Canada.
John Lindeman: If you look back to 2024, roughly 5% of our total sales came from Canada, and in a meaningful way it is applicable to our peat business up in Edmonton. And as it stands now, you know, we see competitors passing along to customers the, you know, the incremental cost of tariffs. And in that instance, you know, we intend to do the same, but it's very fluid situation. I think. There are customers, and frankly, people across the broad population that still think there's some chance that these may be somewhat temporary if, you know, the administration to the north sort of meets the expectations of the administration here.
Speaker Change: If you look back to 2020 for roughly 5% of our total sales.
Speaker Change: Came from Canada and.
Speaker Change: In a meaningful way it is.
Speaker Change: Applicable to our peak business up in Edmonton.
Speaker Change: And as it stands now we see competitors passing along to customers.
Speaker Change: The incremental cost of tariffs and in that instance.
Speaker Change: We intend to do the same but it's very fluid situation I think there are customers and frankly people across the broad population that still think there's some chance that these may be somewhat temporary.
Speaker Change: You know the administration to the north sort of meets the expectations of the administration here.
John Lindeman: So, we'll just have to see, but as it stands now, you know, we're intending to sort of follow what we're seeing in this respect and pass along these incremental costs. You know, we're not expecting currently any significant volume impact, but we certainly could see. You know, some customers making choices and how they speculate about tariffs. Which are obviously in play now, but depending if they think they last, you know, we could see some drawdowns on allocation of product that they have with us, you know, from 1 quarter to the next. And certainly all of this could change our net pricing models internally.
So, we'll just have to see but as it stands now we're intending to sort of fall what we're seeing in this respect and pass along these could be the incremental costs were not expecting currently any significant volume impact, but we certainly could see some.
Speaker Change: Some customers, making choices in how they speculate about tariffs, which are obviously in play now.
Speaker Change: But depending on if they think they last we could see some.
Speaker Change: Drawdowns on allocation of product that they have with us from one quarter to the next.
Speaker Change: Certainly all of this could change our net pricing models internally.
John Lindeman: You know, it already is beginning to with the changes we're putting in place right now, you know, we could see some chills as a result of I just said, you know, just to be very clear, we could see some sales shift from.
Speaker Change: It already is beginning to with the changes we're putting in place right now.
Speaker Change: We could see some shale as a result of that you said you know just to be very clear, we could see some sales shift from from one quarter to the next we'll just have to see I guess, the last thing to mention as it pertains to us in this area.
John Lindeman: From 1 and quarter to the next, we'll just have to see, you know, I guess the last thing to mention, and as it pertains to us in this area is just sourcing from China. I mean, there's obviously been tariffs in place on China since. From 1st administration, you know, they're obviously increasing. Now, if you look at us, you know, we, when we went public, we had a more significant, much more actually significant presence and how we source from China over the years. We've tweaked that and change that. And now we're sort of in a about low to mid teams percentage of our sales.
Speaker Change: Is just sourcing from China, I mean, theres, obviously been tariffs in place in China.
Speaker Change: First administrations.
Speaker Change: Obviously, increasing now if you look at us.
Speaker Change: When we went public we had a more significant much more actually significant presence in how we source from China over the years, we tweak that and change that.
Speaker Change: And now we're sort of in a bell.
Speaker Change: Low to mid teens percentage of our sales our products did initiate from China. Those products tend to have larger longer lead times, which is an important notation because as a result of that in this area specifically, we tend to carry a little bit more inventory than we would.
John Lindeman: Are products that initiate from China, those products tend to have large, longer lead times, which is an important notation because as a result of that, in this area, specifically, we tend to carry a little bit more inventory than we would in other areas because of those longer lead times. And that's always been the case for us and we've tried to minimize it, but the reality is, it just takes a while. And so, you know, we, we maintain a little bit more inventory level. So, in that respect, you know, the good news here in that in that instance is that obviously we've got some way to the inventory.
Speaker Change: In other areas because of those longer lead times and that's always been the case for us and we've tried to minimize it but.
Speaker Change: The reality is it just takes a while and so we maintain a little bit more inventory level. So in that respect the good news here in that in that instance is that obviously, we've got some land inventory that's usually measured in the several months kind of timeframe here on the ground in general in most product areas.
John Lindeman: That's usually measured in a, in several months kind of timeframe here on the ground in general in most products. Obviously, it's different from SKU to SKU, but generally speaking, you know, several months. So, you know, we'll have to see. But once again, you know, the intention will be, as we see currently, to pass these along. And obviously, if we see that dynamic change, you know, we'll be prepared and move swiftly.
Speaker Change: Obviously, it's different from SKU to SKU, but generally speaking.
Speaker Change: Several months.
Speaker Change: So we'll have to see but.
Speaker Change: Once again, the intention will be as we see currently to pass these along and obviously, we see that dynamic change we'll be prepared to move swiftly. So overall hopefully that gives you that Lisa listen background on this.
Dimitri Silverstein: So, overall, hopefully, that gives you at least a little some background. It does, John. Thank you for that level of detail. I appreciate it.
Speaker Change: It does John Thank you for that level of detail I. Appreciate it and then one final question if I may and thank you for your time.
Dimitri Silverstein: And then one final question, if I may, and thank you for your time.
Dimitri Silverstein: You mentioned that you may become a little bit more, or not become, but be a little bit more active, if you will, or have some thoughts on the M&A side of the business, whether partnering or perhaps an acquisition. Can you talk a little bit more about specifically what is it that you're looking for? What are you on the lookout for? And what are some of the things that you may be considering when it comes to strategic moves for the company? Yeah, I probably need to be a little bit careful here in specificity. But, you know, look, I can certainly say we can imagine that this is on the minds of all of our stakeholders.
Speaker Change: You mentioned that you may become a little bit more or not be comp but.
Speaker Change: Be a little bit more active if you will or have some thoughts on the on the M&A side of the business whether.
Speaker Change: Partnering or perhaps an acquisition can you talk a little bit.
Speaker Change: More about specifically what is it that you are looking for what are you on the lookout for and more some of the things that you may be considering when it comes to strategic moves for the company.
Speaker Change: Yes, I, probably need to get a little bit careful here in specificity, but look I can certainly say, we we can imagine that this is on the minds of all of our stakeholders frankly, it's on our minds and so I'm really glad you asked.
John Lindeman: Frankly, it's on our minds. And so I'm really glad you asked. You know, if you look at sort of all the key players across the category, we've all been experiencing the same thing. I mean, revenue declines and demand declines have quite simply been pervasive now for, you know, two years plus. And, you know, it's been prolonged and taking longer for a turnaround than all of us would have wanted or expected. And so, you know, usually when you see that kind of thing in an industry, there tends to be a fair amount of real consolidation. In our industry, at least among sort of the more meaningful players, in the supply chain, there really just hasn't been a lot of consolidation.
Speaker Change: If you're looking at sort of all key players across the category. We've all been experiencing the same thing I mean revenue declines.
Speaker Change: And demand declines so quite simply been pervasive now for.
Speaker Change: Two years plus and.
Speaker Change: It's been prolonged and taking longer turnaround than all of us would have wanted or expected and so usually when you see that kind of thing in an industry. There tends to be a fair amount of real consolidation in our industry at least among the sort of the more meaningful players.
Speaker Change: In the supply chain, they're really just hasnt been a lot of consolidation.
John Lindeman: And so we just wanted to be very clear about it that, you know, we can control what we can control and, you know, Bill and I have been consistent on this, you know, we are, we continue to monitor very aggressively opportunities that could enhance shareholder value, and that could be, you know, we could possibly pull up a tuck-in acquisition that helps us diversify either geographically or quite possibly, you know, outside of the cannabis space altogether. You know, we, we've also looked at some opportunities. We know there's some assets inside of our business that have real attraction to some folks.
Speaker Change: And so we just wanted to be very clear about it.
Speaker Change: But we can control we can control.
Speaker Change: Bill not been consistent on this you know we are we continue to monitor very aggressively.
<unk> used it could enhance shareholder value and that could be we could possibly pull off a tuck in acquisition.
Speaker Change: It helps us diversify either geographically or quite possibly.
Speaker Change: You know outside of the cannabis space altogether.
Speaker Change: We've also looked at some opportunities we know there's some assets inside of our business that have real attraction with some folks and so you know.
John Lindeman: And so, you know, we've, we've at least given to some of those things, some real consideration. And then, lastly, you know, complete strategic combination is something that in a couple of instances, we think could be really helpful for the industry overall and frankly, make it a little bit of a healthier place. But also good for our shareholders under the right set of conditions. And so, you know, Bill and I and others here, you know, we continue to work this. So along with some partners of ours, we'll just have to see.
Speaker Change: We've at least given that some of those things some real consideration and then lastly, you know complete strategic combination is something that.
Speaker Change: And a couple of instances, we think could be really helpful.
Speaker Change: The industry overall, and frankly make it a little bit of a healthier place.
Speaker Change: But also good for our shareholders under the right set of conditions and so.
Speaker Change: Bill and I and others here, we continue to work. This so along with some partners of ours.
Speaker Change: We'll just have to see.
Dimitri Silverstein: Understood, I appreciate that, and I understand you can't be more specific, but I appreciate the granularity on that.
Speaker Change: Understood I appreciate that if I understand you cant be more specific.
I appreciate the granularity on that well.
Dimitri Silverstein: Well, I'm going to get back into the queue and just wish you luck in 2025. It sounds like we're going to start the year a little bit slower, but hopefully the momentum will build as the year unfolds. Thanks, Dimitri. Appreciate that.
Speaker Change: Get back into the queue and just wish you luck in 2025, it sounds like we're going to start the year, a little bit slower, but hopefully that momentum will build as the euro.
Speaker Change: <unk>.
Speaker Change: Thanks, Dmitry I appreciate that.
Operator: Thank you and at this time we have no further questions that will end today's presentation. We thank you for your participation. You may disconnect.
Speaker Change: Thank you and at this time, we have no further questions that will end today's presentation. We thank you for your participation you may disconnect.