GrowGeneration Corp.

Hello, and welcome to the Grow Generation third quarter 2022 earnings conference call. My name is Keith. I'll be coordinating your call today. Following prepared remarks, we will open the call to questions from analysts with instructions to be given at that time. I will now hand the call over to Clay Crumlis with ICR. Please go ahead.

Thank you, and welcome everyone to the Grow Generation third quarter 2022 earnings results conference call. Today's call is being recorded. With us today are Mr. Darren Lampert, co-founder and chief executive officer, and Greg Sanders, chief financial officer of Grow Generation Corp. You should have access to the company's third quarter earnings press release issued after the market closed today. This information is available on the investor relations section of Grow Generation's website at ir.growgeneration.com. Certain comments made on this call include forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward looking statements are based on management's current expectations and beliefs concerning future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in these forward looking statements. Please refer to today's press release and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any of the forward looking statements made today. During the call, we will use some non-GAAP financial measures as we describe business performance. The SEC filing, as well as the earnings press release, which provide reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures, are all available on our website. Following our prepared remarks, we will take questions from research analysts. We ask that you please limit yourself to one question and one follow-up. If you have additional questions, please re-enter the queue, and we will take them as time allows. Now, I will turn the call over to our co-founder and CEO, Darren Lampert. Darren?

Thanks, Clay, and good afternoon, everyone. Thank you for joining us today to discuss our third quarter 2022 financial results and our updated full-year guidance. To start, I'd like to thank each one of our employees across our corporate center and 58 retail locations for your continued support of Growjet. It's been a challenging year, but I, along with the rest of the executive team, appreciate your continued hard work and dedication to our vision and strategic plan. We are pleased to report that our sales in the third quarter came in ahead of our internal plan at $71 million, bolstered primarily by stronger-than-expected demand within our distribution and private label business unit. While we expect a broader softness across hydroponics to continue, we are encouraged that our efforts to right-size the business are starting to show in our financial results. And we are optimistic that the work we are doing is putting GrowGen in a significantly better position going into 2023. As we detailed last quarter, the broader cannabis and hydroponic industry remains in a prolonged downturn that is negatively impacting all participants across the cannabis value chain from growers to suppliers to retailers. With the continued oversupply of cannabis in the marketplace and not enough demand to absorb it, we are not yet seeing growers add meaningful new capacity, and therefore hydroponic demand remains slow across the United States. While we are seeing some early signs of stabilization, we are still not prepared to definitely say that the worst of this cycle is behind us. With that in mind, we remain dedicated to controlling the areas of the business which we are able to control. We've made significant progress across many aspects of our company over the past nine months. We remain highly fiscally prudent with a hyper focus on cost controls, improving profitability, and preserving and growing our capital base. As Greg will detail, excluding Q3 unusual expenses, We believe that the company would have been profitable on an adjusted EBITDA basis. As a result of these efforts, GroGen remains on solid financial footing. We have a strong balance sheet, and we don't anticipate the need for external debt or equity issuance. We currently have $71 million of cash and cash equivalents with zero debt, representing a sequential increase of $6 million in our net cash position over the second quarter of 2022. We continue to feel very good about our liquidity position well into the foreseeable future. And I want to reassure you again, the company has the ability to meet the ongoing operational needs of the business without additional capital, even if the current market conditions persist. Now I'd like to provide an update on some of our key strategic initiatives this year and where we stand on each. As you will recall, we recognized the need early this year to shift our focus towards cost control, store consolidation, inventory reduction, and cash generation. I'm proud that we've made excellent progress on those operational initiatives. And in addition, I'm excited about some opportunities to begin repositioning our company for the next phase of growth. As I think it's worth repeating, in the third quarter of 2022, we generated $6 million of cash, ending the quarter with more than $71 million on the balance sheet. We reduced inventory quarter over quarter by $10 million compared to the end of the second quarter of 2022, which amounts to an aggregate reduction in our retail business of more than $24.1 million in inventory year-to-date since December 31st, 2021. While our inventory reduction efforts have generally occurred at discounted prices, which clearly resulted in gross margin pressures in the third quarter, we believe it was the prudent thing to do in order to right-size our working capital base and prioritize cash generation. We believe that the inventory reduction and skew rationalization plan will be near completion by the end of fiscal year 2022. On the expense side, we've reduced payroll by an incremental 1.7 million in the quarter and 11.7 million year-to-date. This equates to a 28% payroll reduction and a 41% headcount reduction during 2022. We also closed five stores during the quarter and opened two new stores, bringing our total store count today to 58 locations. Recall that most of these store closures have been to correct overlaps in the retail footprint. where we expect very little lost sales, but to also lean into our new ERP platform and DC supply chain model, which we believe will deliver more efficiencies and lower costs across the enterprise. As we enter into the 2023 fiscal year, cost savings from store consolidations, reduced payroll expenses, improved shipping costs from declining ocean freight rates, reduced headwind from inventory discounting on our margins, and a greater percentage of private label sales will all have a positive impact on EBITDA and profitability next year. Looking ahead for a moment, with the hydroponic market in consolidation, there are growth opportunities for GrowGen beginning to emerge. A strong balance sheet along with strong distribution capabilities allows us to selectively take advantage of these opportunities. We believe there are compelling opportunities to acquire stores and fill in white space throughout the country in areas where GrowGen does not have a physical presence. In that regard, we're excited about the addition of two new stores in the fourth quarter in Missouri and New Jersey, which represent strategic markets for GrowGen. In 2023, GrowGen aims to begin exploring possibilities in a nascent indoor vertical farming market with our own proprietary fertilizers and indoor farming solutions that are natural extensions of our cannabis business. We were especially excited to announce that we recently entered into an agreement with Dr. Jorge Vivanco of Colorado State University, one of the country's leading horticulturists, who is focusing on indoor farming with specialty crops, crop genetics, and water-soluble fertilizers and additives. In fact, we're positioning our newest store that opened in Richmond, Virginia in September as a hydroponics and garden center. We think this small shift in branding, along with a broader in-store product assortment, will allow us to drive increased store traffic by attracting new customers who are interested in growing produce indoors. Our private label strategy remains one of our top initiatives, and we see this growing as a key enabler of growth and margins going into next year. We are driving sales of proprietary brands and private label products, and we are investing in resources to provide customer service, product development, and distribution excellence. Private label accounted for 7.1 million of retail and e-commerce sales in the third quarter, which is around 14% of our overall retail and e-commerce sales, growing 8% year over year as a percent of sales. As a reminder, our private label products generally enjoy higher gross margins, so as we increase our private label sales mix relative to our branded sales, we expect the accompanying margin benefit to help drive our profitability improvements. On the legislative front, we continue to monitor and support actions at the national level of moving towards the passage of the SAFE Act. with the ultimate end goal of federal cannabis legalization. We were encouraged by President Biden's recent unilateral action to pardon those convicted of federal cannabis possession or usage and his urging of states to do the same to state-level convictions. We think it's indicative of the American public's overwhelming support of federal cannabis legalization. While the outcome of tomorrow's midterm elections could result in a setback towards federal legalization if control of the Senate were to change. We continue to think it's only a matter of time. In other words, when, not if. And, as we've said before, our business model does not depend on legalization. As Greg will detail for you shortly, we are increasing our full-year guidance for both net revenue and adjusted EBITDA. On the top line, the updated guidance reflects stronger third quarter sales, and embeds a seasonally slower fourth quarter. I want to welcome Greg to his first public earnings call as the CFO of Growjet. Greg has been with the company for over five years as our controller. He is intimately familiar not only with the numbers, but also with our entire organization and our executive team. And I am thrilled with how quickly he has embraced his new role and the positive impact he is contributing to the corporation. With that, I will turn the call over to our CFO, Greg Sanders.