Q1 2025 Hydrofarm Holdings Group Inc Earnings Call

Operator: To all sites on hold, we appreciate your patience and ask that you please continue to stand by.

I appreciate your patience.

Please continue to standby.

[music].

Operator: Theme Music Please stand by, your program will begin momentarily.

Stand by your program will begin momentarily.

[music].

Anna Kate Heller: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hydrofarm Holdings Group First Quarter 2025 Earnings Conference Call. At this time, all participants have been placed in a listen only mode and the lines will be open for your question following the presentation.

Speaker Change: Good day, ladies and gentlemen, and thank you for standing by welcome to the Hydro Farm holding group first quarter 2025 earnings Conference call.

Speaker Change: 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 13, 2025, I would now like to turn the call over to indicate halloran at ICR to begin.

Operator: Please note this conference is being recorded today, May 13th, 2025.

Anna Kate Heller: I would now like to turn the call over to Anna Kate Heller at ICR to begin. Thank you and good morning.

John Lundgren: Thank you and good morning with me on the call today is John Lundgren hydrocarbons, Chief Executive Officer, and Kevin O'brien, The company's Chief Financial Officer by now everyone should have access to our first quarter 'twenty 25 earnings release and form 8-K issued this morning as long as an investor presentation available for Africa.

John Lindeman: With me on the call today is John Lindeman, Hydrofarm's Chief Executive Officer, and Kevin OBrien, the company's Chief Financial Officer. By now, everyone should have access to our first quarter 2025 earnings release in 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 hydrofarm.com.

John Lundgren: As soon as they're available on the investors section of Hypersound website at harvest time 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. These statements are also subject to numerous risks and uncertainties that could cause actual results.

John Lindeman: Before we begin our formal remarks, please note that our discussion today will include forward-looking statements. These forward-looking statements are not guaranteed for future performance, and therefore, you should not put undue reliance on them. These statements are also subject to new risks and uncertainties that could cause actual results to differ materially from our current expectations.

John Lundgren: To differ materially from our current expectation for all of you to our recent SEC filings for more detailed discussion of the risks that 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.

John Lindeman: We refer all of you to our recent S&P filings for a more detailed discussion of the risks that could impact our future operating results and financial conditions.

John Lindeman: 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 Lundgren: As a substitute for results prepared in accordance with GAAP and reconciliations to comparable GAAP measures are available in our earnings release.

John Lindeman: With that, I would like to turn the call over to John Lindeman. Thank you Anna and Kate. Good morning everyone. In the first quarter of 2025, we deliver promising sequential improvements across the business. Coming into the year, our first priority was to reemphasize the focus on our higher margin proprietary brands across the Hydrofarm platform to drive high quality revenue streams and improve profitability. We took a number of actions to help build momentum in these offices. And as a result, compared to the challenging fourth quarter, our first quarter proprietary brand sales mix improved meaningfully to 55% from 52%, helping to drive a substantial sequential improvement in our adjusted gross profit margin.

Speaker Change: What I would like to turn the call over to John Linda.

John Linda: Thank you Kate and good morning, everyone.

John Linda: In the first quarter of 2025, we deliver promising sequential improvements across the business.

John Linda: Coming into the year, our first priority was to reemphasize the focus on our higher margin proprietary brands across the hydropower platform to drive high quality revenue streams and improve profitability.

John Linda: We took a number of actions to help build momentum in these offerings and as a result compared to the challenging fourth quarter or first quarter proprietary brand sales mix improved meaningfully to <unk>, 55% from 52% helping to drive a substantial sequential improvement in our adjusted gross profit margin.

John Lindeman: This also led to sequential growth and adjusted EBITDA in each month within the quarter. Our strategic initiative to drive sales in our proprietary brands has been effective in the past and allows us to operate profitably at compressed industry sales levels for many quarters over the past couple of years. While we have plenty more work to do to sustain and improve this statistic, we are encouraged by our first quarter results.

John Linda: This also led to sequential growth in adjusted EBITDA in each month within the quarter.

John Linda: Our strategic initiatives to drive sales in our proprietary brands. So it's been effective in the past and allow us to operate profitably at compressed industry sales levels for many quarters over the past couple of years.

John Linda: While we have plenty more work to do to sustain and improve this statistic. We are encouraged by our first quarter results.

John Lindeman: I'd also like to call out a few additional bright spots from the quarter. First, we saw relatively strong year-on-year and sequential performance from several of our proprietary consumer brands in the nutrients and grow media categories. On the durable side, while the overall category had a difficult quarter, we saw year-on-year and sequential growth in one of our proprietary lighting brands. Collectively, the improvement in these areas helped lift our proprietary brand mix against the fourth quarter of 2024. On the distributed side, we continue to benefit from incremental sales of the brands onboarded in the spring of 2024.

John Linda: I'd also like to call out a few additional bright spots from the quarter.

John Linda: First we saw relatively strong year on year and sequential performance from several of our proprietary considerable brands and the nutrients and growing media categories.

John Linda: On the durable side, while the overall category had a difficult quarter, we saw year on year and sequential growth in one of our proprietary lighting brands.

John Linda: Selectively the improvement in these areas helped to lift our proprietary brand mix I guess, the fourth quarter of 2024.

John Linda: On the distributor side, we continued to benefit from incremental sales of the brands on board in the spring of 2024.

John Lindeman: With that said, distributed brands overall continue to weigh on our profit margins and consistent with our strategic priorities, our focus will remain centered on our proprietary brand. In Q1, we also delivered our 11th consecutive quarter of meaningful adjusted SG&A expense savings. The roughly 11% expense savings versus last year were largely in people costs and facility expenses in conjunction with the integration and consolidation of our front and back offices conducted over the past 12 months. We were also off to a decent start in our non-cannabis and non-US Canadian sales mix, which accounted for more than a quarter of our total sales in Q1.

John Linda: With that said distributed brands overall continued to weigh on our profit margins and consistent with our strategic priorities. Our focus will remain centered on our proprietary brands.

John Linda: In Q1, we also delivered our 11th consecutive quarter of meaningful adjusted SG&A expense savings.

John Linda: Roughly 11% expense savings versus last year were largely in people cost and facility expenses in conjunction with the integration and consolidation of our front and back offices conducted over the past 12 months.

John Linda: We are also off to a decent start in our non cannabis and non U S. Canadian sales mix, which accounted for more than a quarter of our total sales in Q1.

John Lindeman: We remain on pace this year to further improve upon the full year metric that we achieved last year.

John Linda: We remain on pace this year to further improve upon the full year metric that we achieved last year.

John Lindeman: One of our product sets that tends to skew towards non-cannabis applications is our peat boss. And as a reminder, we harvest our peat moss in Canada, but the majority of the product is imported and sold into the United States. During the first quarter, the U.S. government flip-flopped on the products that qualify under Canadian import tariffs. Eventually, the government clarified in March that Canadian peat would be tear free as it had been for years prior as a qualified product under the USMCA agreement. During this period, we noticed our U.S. customers pausing until there was clarity on the situation, which led to unpredictable ordering patterns within the quarter.

John Linda: One of our product sets that tends to skew towards non cannabis applications is our peak Boston business and as a reminder, we harvest our peat Moss in Canada, but the majority of the product is imported and sold into the United States.

During the first quarter the U S government flip flopped on the products that qualify under Canadian import tariffs.

John Linda: Eventually the government clarify the March the Canadian Pete would be tariff free as it had been for years prior as a qualified product out of the U S. MCA agreement.

John Linda: During this period, we noticed our U S customers pausing until there is clarity on the situation, which lead to unpredictable ordering patterns within the quarter.

John Lindeman: With that behind us, we expect our business will pick up and further contribute to our diversification strategy.

John Linda: With that behind US, we expect our PS business will pick up and further contribute to our diversification strategy.

John Lindeman: While our overall results were strong compared to the fourth quarter, we were hampered by prolonged industry oversupply challenges, lack of government progress on items such as rescheduling and safer banking, and continued consolidation across the retail customer base. While these conditions weighed on our year-over-year results, we were certainly not alone. In fact, we noticed among the public reporters in our space that for the first time since our IPO, Hydrofarm was the largest generator of hydroponic equipment and supplies revenue in the quarter. We would much prefer to see everyone across our industry prosper, but thought it was an interesting point nonetheless.

John Linda: While our overall results were strong compared to the fourth quarter, we were hampered by prolonged industry oversupply challenges lack of government progress on items, such as rescheduling and safer banking and continued consolidation across the retail customer base.

John Linda: While these conditions weighed on a year over year results, we were certainly not alone.

John Linda: We noticed among the public reports in our space that for the first time since our IPO Hydra farm was the largest generator hydroponics equipment and supplies revenue in the quarter.

John Linda: We would much prefer to see everyone across our industry prosper, but thought it was an interesting point nonetheless.

John Lindeman: Also of note is the current uncertainty surrounding tariffs. You've already heard me talk about the Q1 tariff situation with Aurora Peak, which we believe is behind us. As it relates to direct tariff exposure across our business, we source certain lighting and equipment products within our durables category from China, which account for an estimated low to mid-teens percentage of our net sales. Generally speaking, we maintain larger inventory positions in products sourced from overseas as the lead times are much longer than domestically sourced products. That said, we are actively engaged in renegotiations with existing vendors while also evaluating alternative cost-effective sourcing options.

John Linda: Also of note is the current uncertainty surrounding tariffs you've already heard me talk about the Q1 tariff situation with Roar, Pete which we believe is behind us as it relates to direct tariff exposure across our business, we source certain lighting and equipment products within our durables category from China, which account for an estimated low.

John Linda: The mid teens percentage of our net sales.

John Linda: Generally speaking, we maintain larger inventory positions and products sourced from overseas as the lead times are much longer than domestically sourced products.

John Linda: That said, we are actively engaged in renegotiations with existing vendors, while also evaluating alternative cost effective sourcing options.

John Lindeman: Our consumables business is much more insulated from the ongoing trade disputes. And as you know, consumables are both the largest and strongest part of our business. The terrorist situation is rapidly evolving and remains very complex, as we witness from yesterday's announcement, effectively pausing the Very High China terrorist for 90 days. As a result, it has become challenging to make any accurate forecasts on the impact of tariffs on our future performance, particularly within our durable products category.

John Linda: Our consumables business, that's much more insulated from the ongoing trade disputes and as you know consumables are both the largest and strongest part of our business.

John Linda: The tariff situation is rapidly evolving remains very complex as we witnessed from yesterday's announcement effectively pausing the very high China tariffs for 90 days.

John Linda: As a result, it does become challenging to make any accurate forecast on the impact of tariffs on our future performance.

John Linda: Particularly within our durable products categories.

John Lindeman: Although our Q1 performance was in line with our prior full year guidance on all metrics except free cash below, with the continued tariff uncertainty on top of the prolonged industry challenges, we believe it is best to withdraw our full year 2025 guidance for net sales, adjusted EBITDA, and free cash below at this time. We intend to provide an update once we have a clear view on the impact of tariffs and the details behind our own Reciprocal Action Plan. To support additional margin expansion while operating under the new tariff regime, we are conducting a thorough review of our product portfolio and distribution network to better align with estimated sales demand.

John Linda: Although our Q1 performance was in line with our prior full year guidance on all metrics, except free cash flow with the continued tariff uncertainty on top of the prolonged industry challenges. We believe it is best to withdraw our full year 2025 guidance for net sales adjusted EBITDA and free cash flow at this time.

John Linda: We intend to provide an update once we have a clear view on the impact of tariffs and the details behind our own reciprocal action plans.

John Linda: To support additional margin expansion, while operating under the new tariff regime. We are conducting a thorough review of our product portfolio and distribution network to better align with estimated sales demand.

John Lindeman: We believe that streamlining our product set could further improve our gross profit margins and help us capture additional adjusted SG&A expense savings. As a reminder, we have a demonstrated track record of effective restructuring and cost-saving actions that have reduced our manufacturing and distribution space by approximately 50 percent, improved full-year adjusted gross profit margins by several hundred basis points, and driven consistent adjusted SG&A expense savings since 2022. We have done this while simultaneously investing in productivity-enhancing capital equipment, which has strengthened our operational capabilities and helped us maintain exceptional customer service. While we cannot control the timing of future government action on either the tariff or industry front, we can and will continue to control our product portfolio, our manufacturing and distribution footprint, and our team's focus and capabilities.

John Linda: We believe the streamlining our products that could further improve our gross profit margins and help us capture additional adjusted SG&A expense savings.

John Linda: As a reminder, we have a demonstrated track record of effective restructuring and cost saving actions that have reduced our manufacturing and distribution space by approximately 50% improved full year adjusted gross profit margins by several hundred basis points and driven consistent adjusted SG&A expense savings since 2022.

John Linda: We have done this while simultaneously investing in productivity enhancing capital equipment, which has strengthened our operational capabilities and helped us maintain exceptional customer service.

John Linda: While we cannot control the timing of future government action on either of the tariff or industry front, we can and will continue to control our product portfolio, our manufacturing and distribution footprint and our team's focus and capabilities.

John Lindeman: We will continue building on these positives we delivered in the first quarter and are committed to executing on these strategic priorities moving forward.

John Linda: We will continue building on these positives we delivered in the first quarter and are committed to executing on these strategic priorities moving forward.

John Lindeman: I would like to reiterate one last point before handing it over to Kevin. We are in the process of actively pursuing strategic alternatives that are designed to enhance shareholder value, whether in the form of a potential acquisition, divestiture, or strategic combination. While we have nothing yet to report on this front, we will keep you in tune as and when appropriate.

Speaker Change: I would like to reiterate one last point before handing it over to Kevin.

John Linda: We are in the process of actively pursuing strategic alternatives.

Kevin: And to enhance shareholder value whether in the form of a potential acquisition divestiture or strategic combination.

Kevin: While we have nothing yet to report on this front, we will keep you in tune as and when appropriate.

Kevin OBrien: With that, I'll hand it over to Kevin to further discuss the details of our first quarter financial results. Thanks, John, and good morning, everyone. Net sales for the first quarter were $40.5 million, down 25.2% year-over-year, driven primarily by a 22.6% decrease in volume mix and a 1.8% decline in price. This decrease in volume mix was mainly related to an oversupply in the cannabis industry. The pricing decline was driven by promotional activity in the period. Proprietary brands accounted for 55% of our net sales down compared to the prior year first quarter. However, as Jon highlighted, this metric improved meaningfully when compared to the fourth quarter of 2024.

Kevin: With that I'll hand, it over to Kevin to further discuss the details of our first quarter financial results.

Kevin: Thanks, John and good morning, everyone.

Kevin: Net sales for the first quarter were $40 5 million down 25, 2% year over year.

Kevin: Primarily by a 22, 6% decrease.

Kevin: Volume and mix and a one 8% decline in pricing.

Kevin: This decrease in volume mix was mainly related to an oversupply in the cannabis industry.

Kevin: <unk> decline was driven by promotional activity in the period.

Kevin: Proprietary brands accounted for 55% of our net sales down compared to the prior year first quarter.

Kevin: However, as John highlighted this metric improved meaningfully when compared to the fourth quarter of 2024.

Kevin OBrien: The corrective actions we began to implement at the end of 2024 were effective in the first quarter, and we will continue to invest behind our higher margin key proprietary brands to further this momentum. During the first quarter, consumable products accounted for over three quarters of our total sales, representing a small increase over 2024. Gross profit in the first quarter was $6.9 million, or 17% of net sales, compared to $10.9 million, or 20.2% of net sales in the year-ago period. Adjusted gross profit was $8.5 million, or 21% of net sales, compared to $12.7 million, or 23.4% of net sales last year.

Kevin: The corrective actions, we began to implement at the end of 2020 for more effective in the first quarter and we will continue to invest behind our higher margin key proprietary brands to further this momentum.

Kevin: During the first quarter consumable products accounted for over three quarters of our total sales representing a small increase over 2024.

Kevin: Gross profit in the first quarter was $6 9 million or 17% of net sales compared to $10 9 million or 22% of net sales in the year ago period adjusts.

Kevin: Adjusted gross profit was $8 5 million or 21% of net sales compared to $12 7 million or 23, 4% of net sales last year.

Kevin OBrien: The decrease was due to lower net sales and a reduction in proprietary brand mix in the quarter. However, our adjusted gross profit margin more than doubled when compared to the fourth quarter of 2024, as we improved proprietary brand sales sequentially. Specifically, we sold more of our key nutrient and grow media brands that we manufacture in the U.S.

Kevin: The decrease was due to lower net sales and a reduction in proprietary brand mix in the quarter. However.

Kevin: However, our adjusted gross profit margin more than doubled when compared to the fourth quarter of 2024, as we improved proprietary brand sales sequentially.

Kevin: Specifically, we sold more of our key nutrient and grow media brands that we manufacture in the U S.

Kevin OBrien: I'll now provide an update on our restructuring and cost-saving action. By the end of 2024, we had substantially completed the second phase of our restructuring plan. That plan consisted of significant reductions to our manufacturing and distribution footprint, particularly with respect to durable equipment products.

Kevin: I will now provide an update on our restructuring and cost saving actions.

By the end of 2024, we had substantially completed the second phase of our restructuring plan.

Kevin: That plan consisted of significant reductions to our manufacturing and distribution footprint.

Kevin: Particularly with respect to durable equipment products.

Kevin OBrien: While the prior year restructuring plan has been completed, in light of the continued challenging industry conditions and the complex international tariff situation, we are evaluating our product portfolio and several related actions to further right-size the business. We believe there is opportunity to improve efficiency and profitability and focus our resources on Hydrofarm's core proprietary brand strategy and innovations that drive growth and volume in our U. S. and Canadian manufacturing location.

Kevin: While the prior year restructuring plan has been completed.

Kevin: In light of the continued challenging industry conditions in the complex international tariff situation, we are evaluating our product portfolio and several related actions to further right size the business.

Kevin: We believe there is opportunity to improve efficiency and profitability and focus our resources.

Kevin: Resources on hydro farms core proprietary brand strategy and innovations to drive growth and volume in our U S and Canadian manufacturing locations.

Kevin OBrien: Moving on to our selling, general, and administrative expense. In the first quarter, our SG&A expense was $17.9 million compared to $19.6 million last year. Adjusted SG&A expenses were $11 million, an 11% reduction when compared to $12.3 million last year. This is our 11th consecutive quarter of significant year-over-year adjusted SG&A savings. We have made substantial progress and believe there is opportunity for further cost savings. We are actively reviewing opportunities to reduce facility space and overall inventory levels in connection with our product portfolio review and distribution center consolidation.

Kevin: Moving on to our selling general and administrative expense in the first quarter. Our SG&A expense was $17 9 million compared to $19 6 million last year.

Kevin: Adjusted SG&A expenses were $11 million and 11% reduction when compared to $12 $3 million last year. This is our 11th consecutive quarter of significant year over year. Adjusted SG&A savings, we have made substantial progress and believe there is opportunity for further cost savings.

Kevin: We are actively reviewing opportunities to reduce facility space and overall inventory levels in connection with our product portfolio review and distribution Center consolidations.

Kevin OBrien: Adjusted EBITDA was a loss of $2.4 million in the first quarter. The loss was due to lower net sales and lower adjusted gross profit margin, partially upset by adjusted SG&A savings. While the year-over-year comparison was unfavorable, adjusted EBITDA improved by $4.8 million compared to the fourth quarter of 2024. portion of that is seasonality in our business. But the sequential performance also speaks to the initial impacts of the improvement in our proprietary brand.

Kevin: Adjusted EBITDA was a loss of $2 4 million in the first quarter loss was due to lower net sales and lower adjusted gross profit margin, partially offset by adjusted SG&A savings.

Kevin: While the year over year comparison was unfavorable adjusted EBITDA improved by $4 8 million compared to the fourth quarter of 2024.

Kevin: A portion of that is seasonality in our business, but the sequential performance also speaks to the initial impacts of the improvement in our proprietary brand performance.

Kevin OBrien: Moving on to the balance sheet and overall liquidity position. Our cash balance as of March 31st, 2025 was $13.7 million. We ended the first quarter with $119 million of term debt and approximately $127.3 million of total debt, inclusive of financial lease liability. Our net debt at the end of the first quarter was approximately $113.6 million. As a reminder, our term loan facility has no financial maintenance covenant and it does not mature until October 2028. We also continue to maintain a zero balance on our revolving credit facility. As an update, on May 9th, 2025, we entered into a 7th Amendment to our revolving credit facility, which extended the maturity date to June 30th, 2027, and reduced the maximum commitment amount to $22 million.

Kevin: Moving on to the balance sheet and overall liquidity position.

Kevin: Cash balance as of March 31, 2025 was $13 7 million.

Kevin: We ended the first quarter with $119 million of term debt and approximately $127 3 million of total debt.

Kevin: <unk> financial lease liabilities.

Kevin: Our net debt at the end of the first quarter was approximately $113 6 million.

Kevin: As a reminder, our term loan facility has no financial maintenance covenant and it does not mature until October 2028. We also continued to maintain a zero balance on our revolving credit facility.

Kevin: As an update on May nine 2025, we entered into a seventh amendment to our revolving credit facility, which extended the maturity date to June 32027.

Kevin: And reduced the maximum commitment amount to $22 million.

Kevin OBrien: With cash on hand and approximately $17 million of availability on our revolving line of credit, we had $31 million of total liquidity as of March 31, 2025.

Kevin: With cash on hand and.

Kevin: And approximately $17 million of availability on our revolving line of credit.

Kevin: Had $31 million of total liquidity as of March 31, 2025.

Kevin OBrien: In the first quarter, cash used in operating activities was negative $11.8 million and capital expenditures were $0.2 million, yielding negative free cash flow of $12 million. As a reminder, the first quarter is seasonally a negative period for our free cash flow. We are focused on improving our financial position and with the business fully integrated, we are in a better position to manage working capital. We believe we can generate break even or better free cash flow for the remainder of 2025.

Kevin: In the first quarter cash used in operating activities was negative $11 8 million and capital expenditures were 0.2 million, yielding negative free cash flow of $12 million.

Kevin: As a reminder, the first quarter is seasonally a negative period for our free cash flow.

Kevin: We are focused on improving our financial position and with the business fully integrated we are in a better position to manage working capital.

Kevin: We believe we can generate breakeven or better free cash flow for the remainder of 2025.

Kevin OBrien: To close, we are proud of the progress we made in the first quarter. Our strategic actions to reinvigorate our higher margin key proprietary brand sales were effective in the first quarter, and we will continue to invest behind them to deliver positive momentum throughout the year. We remain optimistic for an eventual demand turnaround in the industry and are confident in our positioning for when that comes.

Kevin: To close we are proud of the progress we made in the first quarter, our strategic actions to reinvigorate our higher margin key proprietary brands sales were effective in the first quarter and we will continue to invest behind them to deliver positive momentum throughout the year.

Kevin: We remain optimistic for an eventual demand turnaround in the industry and are confident in our positioning for when that comes we also look forward to providing an update on our product portfolio review on or before our second quarter call in August.

Operator: We also look forward to providing an update on our product portfolio review on or before our second quarter call in August. Thank you all for joining us and we are now happy to answer your questions.

Kevin: Thank you all for joining us and we are now happy to answer your questions.

Operator: Operator, please open the line. Absolutely, at this time, if you would like to ask a question, please press the star and one keys on your telephone keypad. Keep in mind, you can remove yourself from the question queue at any time by pressing star and 2. Again, it is star and 1 if you would like to ask a question today.

Kevin: Operator, please open the line.

Kevin: Absolutely at this time, if you would like to ask a question. Please press the star and one key on your telephone keypad.

Kevin: Keep in mind, you can't remove yourself from the question queue at any time by pressing star and two again it is star and one if you would like to ask a question today.

Dimitri Silverstein: pause for a moment to allow questions to And we'll take our first question from Dimitri Silverstein with Water Tower Research. Please go ahead, your line is open. Good morning, gentlemen. Thank you for taking my question. John, I just wanted to follow up on some comments you made throughout your presentation on the proprietary brand sales and consumables and durable products in the first quarter. You had a nice recovery in your proprietary brands as a percent of revenues to 55% from, I think it was 52% last quarter, but you're still below what you delivered in the first three quarters of last year, which I think it was closer to 56 to 58%.

Kevin: And we'll pause for a moment to allow questions to queue.

Operator: And we'll take our first question from Dmitry Silverstein with water Tower Research. Please go ahead. Your line is open.

Dmitry Silverstein: Good morning, gentlemen, thank you for taking my question.

Speaker Change: John I just wanted to follow up on some comments you made with Ross your presentation on the proprietary brand sales and consumables and durable products in the first quarter.

Speaker Change: You had a nice recovery in your proprietary brands as a percent of revenue was 255% from I think it was 52% last quarter, but you are still below what you delivered in the first three quarters of last year, which I think it was closer to 56% to 58%. So what are you what's your outlook for this business.

John Lindeman: So what's your outlook for this business for the remainder of the year, and your ability to grow it and grow it as a percentage of revenue? And can you provide any additional color on which particular brands are most instrumental in driving that growth?

Speaker Change: For the remainder of the year excuse me and your ability to grow it.

Speaker Change: Throw in as a percentage of revenue and can you provide any additional color on which particular brands are most instrumental in driving that growth.

John Lindeman: Yeah, good morning, Dimitri. And thanks for the question. Yeah, let me attack that. I mean, to start off with. to talk about the nutrient side of our business. Our largest proprietary nutrient brands, which tend to be Grotec and House and Garden, perform better than our internal expectations for the first quarter. You know, in addition to that, in the Grow Media category, we experienced strong performance for our U.S. manufacturer brands, which really surround the Roots Organic product. For largely the same reasons that I'll talk about here in a second on the nutrient side, which is, you know, we have continued to refine our incentive programs coming into 2025 from what they were in 2024.

Speaker Change: Yes, good morning, Dmitry and thanks for the question yes.

Speaker Change: Yes, let me take that.

Speaker Change: Off with let's talk about the nutrient side of our business, our largest proprietary nutrient brands, which tend to be grow tech in house and garden.

Speaker Change: <unk> better than our internal expectations for the first quarter.

Speaker Change: In addition to that in the grow media category, we experienced strong performance for our U S manufacturer brands.

Speaker Change: It's really surround the roots organic product.

Speaker Change: For largely the same reasons that I'll talk about here in a second on the nutrient side, which as you know.

Speaker Change: We have continued to refine our incentive programs coming into 2025 from what they were in 2024.

John Lindeman: We continue to invest behind our sales team's capabilities in a lot of ways in terms of software and research tools and really just trying to make sure we emphasize and reiterate with them the importance of our house brands and make sure that, you know, when they're out there doing so, going against that initiative, they understand it's going to, you know, hit their pocketbook as well. And on top of that, we continue to enhance our marketing efforts. So, all of those reasons are the things that we expect will continue to be able to drive improvement in that percentage over time.

Speaker Change: We continue to invest behind our sales team's capabilities and a lot of ways in terms of.

Speaker Change: Software.

Speaker Change: And research tools and really just trying to make sure we emphasize and reiterate within the importance of our house brands and make sure that.

Speaker Change: When they're out there doing so selling against that initiative they understand it's going to hit their pocket book as well.

Speaker Change: Top of that we continue to enhance our marketing efforts. So all of those reasons are the things that we expect will continue to be able to drive improvement in that percentage over time.

Dimitri Silverstein: Okay, John, that was helpful.

Speaker Change: Okay.

John: Okay, John but that was helpful.

Dimitri Silverstein: You mentioned tariffs and their potential impact.

John Lundgren: You mentioned tariffs and that potential impact can you provide a little bit more color.

John Lindeman: Can you provide a little bit more color on exactly where you're expecting primary tariff pressures, in other words, your actual product cost going out or your selling profit going down because of the tariffs, and also if there's any secondary effects of tariffs as far as just slowing down demand as people are uncertain about what price they're going to end up paying for some of these products? Yeah, let me give you a little bit of background first, and then I'll take your exact question. You know, I mean, look, if you look at our product portfolio, you know, we kind of segmented into consumables and durables at a very, very high level.

John Lundgren: Exactly where youre expecting.

John Lundgren: Primary tariff pressures in other words, your actual product costs going out or you're selling.

John Lundgren: Profit going down because of the tariffs and also if there was any secondary.

John Lundgren: Facts of tariffs as far as just slowing down demand.

John Lundgren: People are uncertain about what price, they're going to end up paying for some of these products.

John Lundgren: Yeah, Let me give you a little bit of background first and then I'll I'll take your exact question.

John Lundgren: I mean look if you look at our product portfolio.

John Lundgren: We've kind of segmented into the consumables and durables about very very high level as you know.

John Lindeman: As you know, you know, three quarters, almost 80% of our business now is in the consumable side versus the durable side. And on the consumable side, we really manufacture, at least for our proprietary brands, most of that product in the United States. There is a little bit up in Canada, which I referenced in our pair of remarks. That product now is clear to come into the United States tariff-free. But I think on the consumable side, we feel fairly good.

John Lundgren: Three quarters, almost 80% of our business now is in the consumable side versus the durable side.

John Lundgren: On the consumable side, we really manufacture at least for our proprietary brands most of that product in the United States. There is a little bit up in Canada, which I referenced in our prepared remarks.

John Lundgren: That product now is clear to come into the United States tariff free I think on the consumables side, we feel fairly good.

John Lindeman: The durable side is where it's a little bit more challenging. We do source some products out of China on the durable side of our business, namely in the lighting and equipment categories. And I think as we may have mentioned in our call, you know, we do have a fair amount of inventory in this area. We've got $50 million of inventory in total sort of ending in the first quarter. And certainly we've got longer lead times in terms of just months on hand in our durable product. So we've got time to sort of make some tweaks and changes.

John Lundgren: The durable side is where it's a little bit more challenging.

John Lundgren: We do source some products out of China on the durable side of our business.

John Lundgren: Namely in the lighting and equipment categories.

John Lundgren: As we May have mentioned in our call. We do have a fair amount of inventory in this area, we've got $50 million of inventory in total.

John Lundgren: Sort of ending in the first quarter.

John Lundgren: Certainly we've got longer lead times.

John Lundgren: In terms of just months on hand in our durable product.

John Lundgren: So we've got time to sort of make some some tweaks and changes we referenced were renegotiating with some vendors.

John Lindeman: You know, we referenced we're renegotiating with some vendors. You know, where we're receiving input costs increases from vendors on the tariff side, we are carefully, when needed, you know, pushing those through. And you know, overall, we're continuing to make some progress there. You know, the pause for 90 days on China certainly seems to help. But you know, we'll have to see. It seems to be day by day in tariff land right now. Hopefully, that helps you a little bit. All right, excuse me, it does.

John Lundgren: Where we're receiving input cost increases.

John Lundgren: From vendors on the tariffs side.

John Lundgren: We're carefully when needed.

John Lundgren: <unk> those through and overall, we're continuing to make some progress there.

John Lundgren: The pause for 90 days on China, certainly seems to help but we'll have to see it seems to be day by day and tariff land right now.

John Lundgren: Hopefully hopefully that helps you a little bit.

John Lundgren: Excuse me.

Dimitri Silverstein: I guess the follow-up question would be, you know, given what's going on with the administration, with the new administration in the White House these days, and, you know, they seem to be a little bit more open to unconventional medicine or functional medicine, however you want to put it, but, you know. Can you talk about the environment in Washington and what you're doing there to try to get the cannabis market, not deregulated, but at least reclassified, and is there any optimism for the balance of this year or at least for this administration to see things change when it comes to your primary market?

John Lundgren: Does.

John Lundgren: I guess the follow up question would be given what's going on with the administration with the New administration in the White House. These days.

John Lundgren: And.

John Lundgren: They seem to be a little bit more open to <unk>.

John Lundgren: <unk> sold Madison or functional Madison, However, you want to put it.

John Lundgren: But.

John Lundgren: Can you talk about sort of the environment in Washington, and what Youre doing there to.

John Lundgren: Try it too.

John Lundgren: Yet.

John Lundgren: The cannabis market.

John Lundgren: Not deregulated, but at least.

John Lundgren: Reclassified.

John Lundgren: Is there any is there any optimism for the balance of this year or at least.

John Lundgren: For this administration to see things change when it comes to Europe primary market.

John Lindeman: Yeah, there is. I mean, look, all of us across the industry continue to push on the regulatory front in our own ways. You know, rescheduling, which has been talked about for some time, seems to have picked up, you know, a few small, but maybe important notes of momentum. You know, first, there was very recently a new poll that came out that was conducted by a research firm that's affiliated with several notable Republicans. suggesting over 70% of Americans are now in favor of rescheduling candidates, and that includes now a majority of Republican voters, which is an interesting point.

John Lundgren: Yes, there is I mean look all of us across the industry continue to push on the regulatory front in their own ways.

John Lundgren: Rescheduling, which has been talked about for some time seems to have picked up.

John Lundgren: A few small, but maybe important notes of momentum.

John Lundgren: First there was very recently a new poll that came out that was conducted by a research firm that's affiliated with several notable Republicans.

John Lundgren: Over 70% of Americans are now in favor of rescheduling candidates and that includes now a majority of Republican voters, which is an interesting point.

John Lindeman: And then on top of that, you know, President Trump's new nominee for the DEA administration just noted in confirmation hearings that the stalled rescheduling process under the prior administrator would now be one of his top priorities upon confirmation into the role. So hopefully that sets the table for some positive momentum on rescheduling. On top of that, President Trump has, there's been some reports, at least, that Trump's been lobbying members of Congress to push forward on safer banking, which also had previously stalled in the Senate. So, you know, as we've mentioned before on previous calls and others in the industry have talked about, rescheduling and safer banking would certainly reduce taxes and open up banking access to growers across the space, so for sure a positive.

John Lundgren: And then on top of that.

John Lundgren: President Trump's new nominee for the DEA administration, just noted and confirmation hearings that the stalled rescheduling process under the prior administrator would now be one of his top priorities upon confirmation of that role. So hopefully that sets the table for some positive momentum on rescheduling.

John Lundgren: On top of that President Trump has there's been some reports at least Trump's been lobbying members of Congress to push forward on safer banking, which also had previously stalled in the Senate. So.

John Lundgren: As we've mentioned before on previous calls and others in the industry have talked about rescheduling and safer banking was certainly reduced taxes and open up banking access to growers across the space for sure are positive and.

John Lindeman: And, you know, we'll look to see as these things build over time, but certainly seems to be stepping in the right direction.

John Lundgren: We will look to see is these things build over time, but certainly seems to be stepping in the right direction.

Dimitri Silverstein: That's very helpful and encouraging.

Speaker Change: That's very helpful and encouraging thank you for that.

Dimitri Silverstein: Thank you for that.

Dimitri Silverstein: You mentioned some positives that you saw in the quarter, so to speak, green shoots that may be starting to emerge in the industry and your business specifically.

Speaker Change: You mentioned excuse me you mentioned some positives that you saw in the quarter.

Speaker Change: The Greens green shoots that may be.

Starting to emerge in the industry and your business specifically.

John Lindeman: Can you revisit that and maybe provide a little bit more granularity on what you mean by that? Yeah, well, look, on top of sort of the industry comments I just made about sort of rescheduling and safer, you know, in terms of our own business specifically, proprietary consumer performance, which is certainly key to our strategy, has been and will continue to be, you know, certainly was positive. We remain on pace for new proprietary product launches set for the United States in the second half of the year. And we continue to push on the international front, having launched existing products into portions of Europe and Southeast Asia with new on-the-ground distribution partners in those regions.

Speaker Change: Can you revisit that and maybe provide a little bit more granularity on what you mean by that.

Speaker Change: Yes, well look on top of sort of the industry comments I just made about the sort of restructuring rescheduling and safer.

Speaker Change: In terms of our own business, specifically proprietary consumer performance, which is certainly key to our strategy has been and will continue to be.

Speaker Change: Certainly was positive we remain on pace for new proprietary product launches set for the United States in the second half of the year and we continue to push on the international front, having launched existing products into portions of Europe, and southeast Asia with new on the ground distribution partners in those regions.

John Lindeman: So those are maybe just a couple areas where we're certainly really pushing.

Speaker Change: Those are the maybe just a couple of areas, where we're certainly really pushing.

Dimitri Silverstein: Thank you for that.

Speaker Change: Understood. Thank you for that so putting that altogether and I know you took off the original guidance for 2025, but how do you see 2025 shaping up.

Dimitri Silverstein: So putting that all together, and I know you took off the official guidance for 2025, but how do you see 2025 shaping up, you know, given what you know now, and obviously, you know, tariffs are still sort of up in the air, but from the things that you can control and from the industry dynamics that you observe right now, what do you, how do you see 2025 unfolding? Yeah, let me let me start by maybe just give a little bit more background and reiterating that, you know, our Q1 performance was generally in line with our previous outlook.

Speaker Change: Given what you know now and obviously tariffs are still sort of up in the air but from the things that you can control and from the industry.

Speaker Change: The dynamics that you observe right now.

Speaker Change: How do you see 2025 on holding.

Speaker Change: Yeah, Let me, let me start by maybe just give a little bit more background and reiterating that our Q1 performance was generally in line with our previous outlook.

John Lindeman: except for the free cash flow dynamic. And so in some ways, our view in the business has not really changed all that much. However, since our last earnings call, obviously the China tariff increased dramatically to 145%, only to be paused for 90 days in yesterday's announcement. So while we've got a lot of inventory on hand, as I mentioned, and have longer inventory positions in several of our China-based products, there still continues to be uncertainty surrounding customer order patterns. Will customers accelerate purchases now only to defer if and when the originally planned higher China tariffs go into effect?

Speaker Change: Except for the free cash flow dynamic.

Speaker Change: And so in some ways our view on the business has not really changed all that much. However, since our last earnings call, obviously, the China tariff increase dramatically to 145% only to be pause for 90 days in yesterday's announcement.

Speaker Change: So while we've got a lot of inventory on hand, as I've mentioned and have longer inventory positions in several of our China. These products are still continues to be uncertainty surrounding customer order patterns will customers accelerated purchases now only to defer if and when the originally planned higher China tariffs go into effect.

John Lindeman: and what would accelerated orders mean against our inventory stockpile and our own purchasing needs?

Speaker Change: And what would accelerated orders mean against our inventory stockpile and our own purchasing needs.

John Lindeman: When we weighed this tariff uncertainty against the prolonged industry recession that's been occurring and our own intentions to really now refine our own product portfolio, we just felt like the prudent thing was to pause guidance for now. With respect to the outlook assumptions, we are maintaining an expectation to improve our adjusted gross profit margin and to lower our adjusted SG&A expense for the full year. This largely relates to the initiatives that we have in place, some of which I explained earlier, that are planned in 2025 and, in many cases, already enacted. We really think these things have an opportunity to continue to influence these full-year KPIs.

Speaker Change: So when we weigh this tariff uncertainty against the prolonged industry.

Speaker Change: Recession, that's been occurring in our own intentions to really now refine our own product portfolio. We just felt like the prudent thing was to pass guidance for now.

Speaker Change: With respect to the outlook assumptions, we are maintaining expectation to improve our adjusted gross profit margin and to lower our adjusted SG&A expense for the full year and this largely relates to the initiatives that we have in place some of which explained earlier.

Speaker Change: That are planned in 2025 and in many cases already enacted.

Speaker Change: We really think these things have an opportunity to continue to influence these full year kpis.

Dimitri Silverstein: You know, so I think, you know, overall, it's, we felt like it's prudent to pause, but in some respects Outlook hasn't changed wildly from when we began the Thank you for that caller.

Speaker Change: So I think overall, it's we felt like it's prudent to pause, but in some respects outlook hasnt changed wildly from from when we began the year.

Speaker Change: Understood. Thank you for that color that's all the questions they have.

Operator: That's all the questions I have.

Speaker Change: Yes.

Operator: And there are no further questions on the line at this time.

Speaker Change: And there are no further questions on the line at this time I will turn the program back to John Lindsay for any additional or closing remarks.

John Lindeman: I'll turn the program back to John Lindemann for any additional or closing remarks. Yeah, thank you all for joining our call this morning and look forward to communication next quarter.

Speaker Change: Yes. Thank you all for joining our call. This morning, and look forward to communication next quarter.

Operator: This does conclude today's program. Thank you for your participation, and you may now

Speaker Change: This does conclude today's program. Thank you for your participation and you may now disconnect.

Speaker Change: [music].

Speaker Change:

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Alright.

Speaker Change: [music].