GrowGeneration Corp.

Hello and welcome to Grow Generation's second quarter 2023 earnings conference call. My name is Chris. 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'll now hand the call over to Clay Crumlis with ICR. Clay, please go ahead.

Good afternoon and welcome everyone to the Grow Generation second quarter 2023 earnings results conference call. Today's call is being recorded. With us today are 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 second quarter earnings 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 second quarter 2023 financial results and our full year 2023 guidance. As always, I want to thank each one of our employees across our company for their continued support of GrowGen. I'm grateful to our entire team for stepping up to every challenge and for being steadfast in executing our company's strategy. I am pleased with GrowGen's second quarter results and happy to discuss the great progress we have made against some of our key initiatives to drive future growth and profitability, including the official launch of our new ERP system on July 1st. In the second quarter of 2023, we generated net revenue of $63.9 million, which represents a 12% sequential improvement over the first quarter of 2023, consistent with the expectations we communicated earlier this year. Recall that historically the second quarter is the strongest quarter of the year due to seasonality of the planting and growing cycle. I'm especially pleased that we generated positive adjusted EBITDA of 856,000 in the quarter, which represents a significant improvement versus the prior quarters adjusted EBITDA loss of $1.8 million. As we've detailed on previous calls, we made significant progress right-sizing our cost structure over the last year, and we're encouraged that those efforts are now bearing tangible results in our P&L. Additionally, we ended the second quarter with $71 million of cash, cash equivalents, and marketable securities, no debt, and $77 million of inventory on our balance sheets. And year to date, we've generated more than $7 million of operating cash flow. All this to say, despite the ongoing challenges in our industry, GrowGen remains in a strong financial position to continue investing for growth while putting profitability at the forefront. I'll reiterate that we are happy with our second quarter results. That represents the progress we've been striving to achieve. However, the broader cannabis industry continues to face headwinds, and GroGen is not immune to these issues. With capital availability and investment at an all-time low and interest rates reaching their highest point since 2007, growers simply aren't building out capacity, which means demand for durable products has slowed beyond what we expected. In addition, the federal legislative agenda has not moved in our favor and, in fact, seems to be getting less favorable. On a positive note, we are seeing continued market acceptance of our private label brand strategy and growth in our consumable products, including our recently launched nutrients and additives line, Drip Hydro, and our cocoa line of products, Charcor. What remains true is that we believe we've made significant progress transforming our business to be more nimble, efficient, and better position for profitable growth in 2023 and beyond. And we certainly not backing away from the priorities we outlined last quarter. We're singularly focused on managing our business despite what's happening in the cannabis industry that may continue to weigh on the balance of the year. While we maintain our cautious optimism about the next 12 months, it's fair to say we are now more on the cautious side about the back half of the year than we were last time we spoke. That said, investing for growth and searching out opportunities is what we're coming to work for every day. As we discussed last quarter, what that means in practical terms is we will continue building and growing our private label brand portfolio and expanding our distribution channels. We remain on the acquisition front with multiple acquisitions in the second quarter and Most importantly, we are putting profitability at the forefront, focusing on margin expansion and profitable growth. Briefly on each of these. First, we remain committed to the expansion of our proprietary and distributed brands, and we are very satisfied with the results of our private label products. Private label accounted for 7.6 million of retail and e-commerce sales in the second quarter of 2023. which is around 15% of our overall retail e-commerce sales, up from 10.7% in the second quarter of 2022. In addition, GroGen is currently working on an expansion initiative that will enhance the shopping experience for all garden enthusiasts. In 2024, we expect to add dedicated gardening sections in select retail stores to attract the home gardening consumer. This development will feature traditional gardening products alongside our private label brands. Second, Progen is actively seeking creative acquisitions where we believe they are complementary to our current business. We believe we're one of the few companies that is well positioned and well capitalized enough to take advantage of the attractive valuations in the hydroponics and garden center space. Our track record of execution with prudent balance sheet management and controlling expenses allows us the flexibility. So far this year, we acquired a store in Traverse, Michigan in January. We entered our 17th state with the acquisition of a store in Bozeman, Montana in early April. We acquired a retail store in Jackson, Michigan in April, and entered our 18th state with the acquisition of two retail locations in Alaska and Maine. Third, we are prioritizing profitable growth. which we believe we will attain through our continued efforts to expand revenue and execute our margin expansion strategies. We are constantly analyzing the business for additional optimization and cost-cutting opportunities and expect to continue benefit to flow through our margins through the remainder of 2023 and 2024. As part of these efforts, we're constantly assessing the performance of our stores with respect to redundancies in the footprint. Separately and importantly, I'm pleased to announce that we have fully rolled out and implemented our new ERP system with Oracle, NetSuite, and point-of-sale and warehouse management systems with Manhattan Associates during the second quarter. This represents a tremendous milestone for GrowGen and our supply chain management capabilities and will directly benefit our company in terms of better freight and logistic rates, optimize order timing and filling, and ultimately improve customer service and relationships. Like many other ERP rollouts, ours has not been without its challenges, and it will take time before benefits fully materialize. But we are confident in our internal team and their ability to manage through the transition. Encouragingly, most of the issues we've encountered have been relatively minor, and we are pleased with the progress that has been made to date We are continuing to work through solutions to some of the more disruptive situations that we expect to have some impact on our third quarter results. This early in the quarter, we are not prepared to quantify those potential impacts, if any, on today's call. Despite that, we are happy where we are in the process, and we look forward to updating you on our progress during our third quarter call in November. Turning to guidance for full year 2023, We're updating our guidance to reflect our view of the broader industry today, given our expectation of softer than expected demand in the third and fourth quarters of this year. We now expect net revenue in the range of $220 million to $225 million and adjusted EBITDA loss in the range of minus $4 million to minus $6 million. With that, I will turn the call over to our CFO, Greg Sanders.