GrowGeneration Corp.

Hello and welcome to Growth Generation's third quarter 2023 earnings conference call. My name is Julie and I will 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 Crumbless with ICR.

Good afternoon, and welcome to the Grow Generation third quarter 2023 earnings results conference call. Today's call is being recorded. With us 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 the Grow Generation 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 forward-looking statements made today. During the call, we'll 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 the 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 2023 financial results and our full year 2023 guidance. As always, I want to thank each one of our employees of course, our company for their continued support of GrowGen. I am grateful to our entire team for their continued hard work, dedication, and for being steadfast in executing our company's strategy. I am pleased with GrowGen's third quarter results, and I'm happy to discuss the progress we have made to drive future growth and profitability, including the launch of our new ERP system and East Region Distribution Center on July 1, and the success of our proprietary brands. Despite the ongoing challenges in our industry, which we have discussed extensively in the past, GroGen remains in a strong financial position with sufficient liquidity to continue investing for growth while putting profitability at the forefront of all we do. In the third quarter of 2023, we generated net revenue of $55.7 million, which represents a 13% decline over the second quarter of 2023. consistent with the expectations we communicated on our second quarter call. Gross margins improved 320 basis points to 29.1 percent versus the prior year's comparable quarter of 25.9 percent, and improved 230 basis points from second quarter gross margins of 26.8 percent. We ended the third quarter with $66.6 million of cash, cash equivalents, and marketable securities no debt, and $76 million of inventory on our balance sheet. Year to date, we've generated approximately $2.8 million of operating cash flow. While the federal legislative agenda has not moved definitively in our favor, it does seem to be getting more favorable. There is renewed optimism for federal reform with the SAFER Act passing the Senate Committee on banking and potentially heading to the Senate floor for a full vote. and if approved, to the House, then the President. More importantly, there is excitement building around cannabis rescheduling after the Department of Health and Human Services recommended rescheduling cannabis from Schedule 1 to 3, which would remove the 280E tax penalty on licensed cultivators, bringing hundreds of millions of dollars back into the cannabis industry. We expect that this would provide a major tailwind for our industry. With that said, our three main initiatives remain our primary focus. As we discussed last quarter, what that means in practical terms is, number one, we're continuing to bring to market innovative new products and growing our proprietary brand portfolio, attracting a larger customer base. Number two, we're building upon our ERP launch and transforming our technology and digital platforms. And number three, We're 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 distributive branch, and we are very satisfied with the results. Proprietary products accounted for 7.4 million of retail and e-commerce sales in the third quarter of 2023, which is around 16.6 percent of our overall retail and e-commerce sales, up from 15 percent in the second quarter of 2023. Product launches include the introduction of the much-anticipated new drip powder nutrient line in Q4, delivering a cost-efficient nutrient solution while not compromising on quality. We're expanding PowerSI with an advanced granular range of beneficial microbial solutions to bolster plant health and optimize growth to be released in Q4. In Q3, we rolled out Charcor Cocoa Coins, entering the propagation market. The Harvest Company, our consumer gardening initiative, is finalizing a diverse product portfolio that includes the already-launched premium gloves and pruners, as well as a garden-in-the-box kit, an all-in-one solution for gardening enthusiasts that includes raised metal beds, soils, fertilizers, and a curated selection of organic seeds. Lastly, MMI Ag is introducing a single-tier mobile bench and tray systems for indoor and greenhouse growers in Q4. Second, our ERP system has been rolled out across all key business verticals. 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. To further develop our key technology initiatives, we have strengthened our leadership team with the addition of a Senior VP of Technology who comes to us with impressive credentials and whose mandate includes gearing our technological advancement and solidifying our digital infrastructure. And third, we are prioritizing profitable growth, which we believe we will attain through our continued efforts to grow revenue, execute our margin expansion strategies, and consolidate stores. We're constantly analyzing the business for additional optimization and cost savings opportunities and expect a continued benefit to flow through to our margins through the remainder of 2023 and 2024. As part of these efforts, we continue to analyze the performance of our current stores with respect to redundancies in the footprint and non-performance. We closed and consolidated six retail locations in the third quarter and are in the process of consolidating and closing six additional locations in the fourth quarter that we expect to be finalized in November. That said, we expect a lower operating expense base and aim to retain the key customers from consolidated locations on a revenue basis. Further, with our recently implemented centralized distribution system, consolidation of shipment and storage, we will reduce our in-store inventory levels and ensure quicker deliveries. The SKU rationalization we executed in Q3 will now allow us to focus on high-demand products and phasing out low-performing SKUs. All these executables are positioning us to operate more effectively and efficiently. Turning to guidance for full year 2023, we are maintaining our guidance of 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.