Hydrofarm Holdings Group, Inc. Price & Performance (HYFM)

We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. 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 substitute for results prepared in accordance with GAAP and reconciliations to comparable GAAP measures are available in our earnings release. With that, I would like to turn the call over to John Lindeman. Thank you, Anke.

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 one of this year And before I begin, I want to thank Bill for his leadership Now, let me begin by stating 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 weaken in the second half of twenty twenty four marked by persistent oversupply challenges and further retail store closings across the [indiscernible] 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 and A through our effective cost saving and restructuring actions. 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 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.

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 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 twenty twenty four in an effort to position our product portfolio for growth. 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 Heidaphyrm platform and are now expecting an improvement in proprietary brand mix for the full year 2025. There were a number of positive developments in 2024 that we intend to further build on this year. For example, in 2024, we saw strong performances from select proprietary consumable brands in the Grow Media and Nutrient categories.

Specifically, full year results for our Aurora Peak brand remained steady, improved 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. 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 com commerce business in 2024 as U. S. Sales for this channel increased over 25%. E commerce 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 fluctuations. And in 2024, we achieved a nearly 200 basis point increase in our sales to non cannabis and non U. S. 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 U. S. Canadian sales mix again this year. Improving profitability by improving the and by reducing our adjusted SG and 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. We also delivered 10 consecutive quarters of meaningful year on year adjusted SG and A savings and are now operating below our pre IPO dollar cost. 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. This starts with reinfiguring our proprietary brand sales mix through targeted marketing investments enhanced sales force capabilities refined incentive structures and additional sales support infrastructure. To enhance our profit margins, we will further optimize our to align with current sales volume and pursue contract manufacturing opportunities to maximize our production capacity.

We further support margin enhancement we will also reduce our SG and A expenses in several areas, including professional and outside services, facility costs and insurance. Managing free cash flow and our overall financial We believe there is room for improvement in this area with tighter working capital management since ERP integrations are now complete software automation is near complete. While we cannot be certain on the timing of an overall industry recovery, we are certain that we will manage these initiatives. Lastly, before I turn it over to Kevin, I should reiterate 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 divestiture. 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. I'm excited to be here on my first earnings call as CFO at Hydrofarm Hydrofarm. Net sales for the fourth quarter were $37,300,000 down 20.9% year over year driven primarily by a 16.8% decrease in volumemix and 3.9% decline in pricing.

The decrease in volumemix 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 a decrease compared to the prior year period. We started Q4 twenty twenty four 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. The negative impact on profitability made clear our strategic priorities for 2025. We are focused on driving performance of our higher margin deep 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 $1,800,000 or 4.9% of net sales. Compared to $8,400,000 or 17.9% of net sales in the year ago period. Adjusted gross profit was $3,600,000 or 9.6% of net sales compared to $11,500,000 or 24.3% of net sales last year 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 $1,400,000 dollars of inventory related charges that were not associated with our restructuring plans. During the fourth quarter, we [indiscernible] to our manufacturing and distribution center footprint Our manufacturing operations are now concentrated in two U. S. Locations plus our Canadian peat moss harvest and processing facility. We successfully integrated our Canadian entities into our main ERP system and reorganize business activities and reporting These integrations were important to reduce costs and are expected to improve operating efficiencies and drive synergies. Given the ongoing challenges in the industry, will continue to evaluate opportunities to drive further efficiencies and cost reductions Moving on to our selling, general and administrative In the fourth quarter, our SG and A expense was $17,000,000 compared to $19,900,000 last year. Adjusted SG and A expenses were $10,800,000 a 10% reduction when compared to $12,000,000 last year For the full year, we achieved a seven due to lower expenses in several areas, including facility expenses, headcount reductions, professional fees and insurance costs. This marks ten consecutive quarters of significant year on year adjusted SG and A savings and we have line of sight into further cost savings in 2025. Net of our plans to invest in proprietary brand marketing.

As previously stated, in connection with our restructuring and related cost saving initiatives, significantly reduced our distribution center facility footprint through sublease 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 consolidations. Adjusted EBITDA was a loss of $7,300,000 in the fourth quarter. The loss was due to lower sales and adjusted gross profit. Partially offset by adjusted SG and A savings. Moving on to our balance sheet and overall liquidity, position 19,300,000.0 of term debt and approximately $128,000,000 of total debt inclusive of financial lease liabilities. Our net debt at the end of the year was approximately $102,000,000 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 with our cash on hand and approximately $13,000,000 of availability, on our untapped revolving line of credit we have $39,000,000 of total liquidity a comfortable position for us. In the fourth quarter, we generated cash flow from operating activities of $2,700,000 dollars and capital expenditures of $300,000 yielding free cash flow of $2,400,000 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 1020% 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 EBITDA to be negative but an improvement compared to full year 2024. To accomplish 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. We also anticipate further reducing our adjusted SG and A in 2025. As John noted, 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. 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 To close, we remain optimistic and the future of Hydrofarm. 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.

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. We'll take our first question from Dmitry 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 going on generally in the market of an industry.

Can you talk a little bit more about what the dynamics look like for the broader environment in your categories you look forward to 2025? And maybe provide some granularity on when you think the oversupply in the channel will be worked off? Good morning, Dmitry. Good morning, Dmitry, and thanks to Yes, sure. I think for STARZ, you need to look back to early last year in 2024. There was a lot of optimism in the category about rescheduling happening about Florida passing, about the SAFER Banking Act. Kind of coming into its own finally And that helps spur a lot of sequential improvement in spending for a period of time. It wasn't a lot, but it was sequential improvement from toward the end of 'twenty three into the spring of 'twenty four. As it became more clear that there was going to be a presidential passing I think expectations and timelines were reset or prolonged. We could see a return to growth in the second half of the year 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.

Paris 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. I mean, as for our internal models, we're expecting double digit sales declines early in the year that moderate as the year unfolds. Regardless, we'll be focusing on our key initiatives that I mentioned earlier. 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 could extract some decent savings there. Opportunity to drive more SG and 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 manage our working capital free cash flow. As you heard Kevin mention, we completed a few ERP integrations this past year. It opens up and gives us a little bit lot of better line of sight on some of our working capital in a way that we think there's opportunity. So in general, hopefully that helps to give you a little bit more perspective on then and now. It does. Thank you very much. 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 the SG and 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?

How much more can you improve your operations and improve your efficiencies as you move through 2025. Yes, great question. Yes, 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 I would say certainly I mentioned it earlier, but optimizing our DC network further is something we could do and we could do it a couple of different ways. We can expand our sublease 3PL relationships or add new ones to effectively reduce our already actively operated space and reduce our net facility costs.

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 there's an opportunity in front of us perhaps in the Western U. S. There's also an opportunity to further reduce our SG and A costs. I mean, we've taken a lot out already to be fair, but we do have line of sight currently on over $2,000,000 to $3,000,000 savings and we think there's opportunity for more. Lastly, maybe on this point is Within our working manufacturing centers, we also have an opportunity to get some lab benefit from productivity initiatives that went into place last year. Now remember, we consolidated two manufacturing facilities actually three into the remaining two here in The U. S. Around Midyear Last Year. And Then We Still Have Our Facility Up In Canada. Now some of those benefits may be masked by 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 ends of our range, we should see some manufacturing benefit this year too.

So in and also in light, of the things I mentioned on working capital, consolidating DCs, just to underscore that, really do have a positive impact on our inventory reductions. And so good opportunity from a working capital standpoint there. I think those are the main points I think. That's helpful. Thank you for that. If I can ask maybe kind of a 30,000 foot view question. Investors in many industries are concerned or at least talking about potential impact of tariffs, whether already announced or potentially announced. We also have obviously you mentioned the new administration, new HHS Secretary, 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? Yes, sure. I mean, for sure, there's a lot of moving parts in tariffs these days, but I totally get that it's on 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 received some product in The United States. Reciprocal from Canada.

But when you match those two together, we're effectively a net in from Canada. 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 peak business up in Edmonton. And as it stands now, we see competitors passing along to customers the incremental cost of tariffs. In that instance, we intend to do the same. But it's very fluid situation. I think [indiscernible] are customers and frankly people across the broad population that still think there's some chance that these may be somewhat temporary if the administration to the North sort of meets the expectations of the administration here? So we'll just have to see. But as it stands now, we're intending to sort of follow what we're seeing in this respect and pass along these incremental costs. We're not expecting currently any significant volume impact. But we certainly could see some customers making choices in how they speculate about tariffs which are obviously in play now. But depending if they think they last, we could see some drawdowns on allocation of product that they have with us from one quarter to the next? And certainly, all of this could change our net pricing models in it already is beginning to with the changes we're putting in place right now. We could see some shales as a result of what I just said, just to be very clear, we could see some sales shift from from one in 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 is just sourcing from China. I mean, there's obviously been tariffs in place on China since Trump's first administration They're obviously increasing now. You look at us, we when we went public, we had a more significant much more actually significant presence in how we source from China. Over the years, we've tweaked that and changed that. And now we're sort of in a [indiscernible] low to mid teens percentage of our sales are products that initiate from China. Those products tend to have 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 we maintain a little bit more inventory level. So in that respect, the good news here in that instance is that obviously we've got some landed inventory that's usually measured in a in several months kind of timeframe here on the ground.

In general in most product areas. Obviously, it's different from SKU to SKU, but generally speaking, several months So we'll have to see, but once again, the intention will be, as we see, to pass these along. And obviously, if we see that dynamic change, we'll be prepared and move swiftly. So overall, hopefully that gives you at least a little some background on this. It's 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. 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 on the M and 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? What are some of the things that you may be considering when it comes to strategic moves for the company? Yes. I probably need to be a little bit careful here in specificity, but look, I can certainly say 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. If you look at sort of all 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 two years plus And it's been prolonged and taking longer for a turnaround than all of us would have wanted or expected. 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 sort of the more meaningful players, in the supply chain there really just hasn't been a lot of consolidation. And so we just wanted to be very clear about it that We can control what we can control and Bill and I have been consistent on this, we are we continue to monitor very aggressively opportunities that could enhance shareholder value and that could be that we could possibly pull off a tuck in acquisition that helps us diversify either geographically or quite possibly outside of the cannabis space altogether. [indiscernible] 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 so we've at least given some of those things some real consideration. And then lastly, 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 so Bill and I and others here we continue to work this. So along with some partners of ours. We'll just have to say. Understood. I appreciate that. And I understand you can't be more specific, but I appreciate the granularity on that. 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, Dimitry. Appreciate that. 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.