GrowGeneration Corp.

Ladies and gentlemen, please continue to stand by. Your conference will begin shortly. Once again, ladies and gentlemen, please continue to stand by. Your conference will begin shortly. Thank you. Thank you. Thank you. Thank you. Hello and welcome. to Grow Generation's fourth quarter 2023 earnings conference call. My name is Jenny, 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 John Mills with ICR. Please go ahead.

Thank you and welcome everyone to the Grow Generation's fourth quarter and full year 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. You should have access to the company's fourth 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 i r dot grow generation dot com certain comments made on this call include forward-looking statements which are subject to safe harbor provisions of the private securities 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 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'll 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'll take them at that time. Now, I will turn the call over to our co-founder and CEO, Darren Lampert. Darren?

Thank you, John, and good afternoon, everyone. Thank you for joining us today to discuss our fourth quarter and full year 2023 financial results and our full year 2024 guidance. As always, I want to thank each one of our employees across our company at Growjet. I'm grateful to our entire team for their continued hard work and dedication. We are pleased that our full year 2023 net revenue of $226 million exceeded our previously communicated guidance range of $220 to $225 million. Adjusted EBITDA for the year came in at a loss of $5.6 million within our previously communicated guidance. We remain encouraged by the progress that we made last year in further right-sizing our business and positioning us for long-term profitable growth. I'm also happy to report that 2024 is off to a strong start. As we noted, a 19% improvement in gardening and cultivation sales in January from December. Further, we observed private label sales as a percentage of revenue eclipsed 20% in January. Because of our hard work and strategic focus, we are seeing areas of year-over-year growth and are optimistic that these efforts will continue to enhance our results. I also want to address our new segmentation that you will see in our 10-K. Moving forward, we have separated our reporting into two segments. First, cultivation and gardening, and second, storage solutions. Our cultivation and gardening segment represents our core hydroponic and organic gardening business. Our second segment, Storage Solutions, represents our MMI acquisition that we made over two years ago to help build out our benching and vertical racking offerings. MMI has grown substantially since acquisition and has become a thriving business in its own right. Looking forward to 2024, we are focused on three main initiatives. Number one, we are continuing to expand our brand portfolio. bringing to market innovative new proprietary products and building key partnerships with best-of-breed manufacturers. Number two, we are attracting a large customer base, expanding our products, partnerships, and opportunities in the home gardening market. And number three, we are putting profitability at the forefront, continuing our focus on cost control, margin expansion, and profitable growth. touching briefly on each of these further. First, we continue to expand our proprietary and distributive brands and remain very satisfied with the results. As we've mentioned previously, a key pillar of our strategy focuses on shifting more of our sales to higher margins proprietary brands. In 2023, proprietary brands accounted for $36.5 million of sales which amounts to approximately 19% of our overall gardening and cultivation sales, up from approximately 15% in 2022. Recent new proprietary products include the much-anticipated drift powder nutrient line, which provides a high-quality, cost-efficient nutrient solution to commercial and craft growers everywhere. We continue to focus on supporting this launch with over 150 active trials being conducted by licensed cannabis cultivators, and we are excited by the early momentum we have seen thus far. We're also enhancing product offerings and customer value by expanding our distribution of top-of-the-line, trusted brands within the hydroponic space. For example, we recently announced a strategic partnership between our wholesale distribution arm, HRG, and Quest Climate, offering high-quality, and advance the humidification capabilities for commercial customers. Strategic partnerships remain a key piece of our strategy, and we continue to evaluate our portfolio of offerings to drive sales growth by providing customers with a comprehensive suite of products. Second, we're excited to announce the official launch of The Harvest Company, our expanding consumer gardening line. This initiative focuses on a specialized product portfolio and branding that resonates specifically with home gardeners, emphasizing GrowGen's commitment to supporting sustainable and healthy living. Approximately one-quarter of all U.S. households grow microgreens, fruits and vegetables, gardening both indoors and outdoors. Our products include the already launched premium gloves and pruners, as well as a garden-in-a-box kit. an all-in-one solution for gardening enthusiasts with raised metal beds, soil fertilizers, and a curated selection of organic seeds. We believe there is a compelling growth opportunity to further expand into the home gardening market and target consumers who want a different garden shopping experience than previous generations and who care about home cultivation of healthier organic microgreens, fruits, and vegetables. We're putting profitability at the forefront with a continued focus on cost control, margin expansion, and profitable growth. As part of our ongoing cost optimization efforts, we consolidated 14 retail locations in 2023 and have already consolidated an additional three retail locations in the first quarter of 2024, bringing our current store count to 47. Although we are constantly monitoring our retail footprint with respect to redundancy and non-performance, we believe our consolidation efforts are largely behind us and look to use our current store count and geographic spread as a base for growth and positive same-store sales. With respect to margin expansion, in addition to increasing sales of our proprietary products, we are very pleased with the growth of the consumable side of our business. especially noted in Q4. As you've heard from us before, consumable products typically command higher margins than durable products, so the shift to a greater percentage of our total sales being in consumable products has helped our margins. Consumable products are also typically reoccurring revenue generators, which offers more predictable revenue, enhanced customer engagement, and opportunities for upselling and cross-selling. particularly for our top proprietary brands. Turning our attention to MMI, our storage solution segment, I am thrilled to report remarkable progress and strategic advancement that underscore our commitment to innovation and excellence in this sector. Over the past two years, MMI has demonstrated exceptional growth, escalating from approximately 12 million in 2021 to approximately $31 million in 2023 revenue. This remarkable achievement is a testament to our team's dedication and the strategic initiatives we have implemented to drive sales growth and operational efficiency. Earnings from MMI have been equally impressive, reaching approximately $9 million in 2023. In conjunction with today's earnings announcement, we're also announcing that we have engaged Lake Street Capital to seek strategic opportunities as it comes to this piece of our business. By monetizing this business, we believe we will maximize shareholder return and give GrowGen further flexibility to pursue growth both organically and through other acquisitions. Finally, before we discuss our 2024 guidance, I'd like to provide a brief update on cannabis legalization The legal landscape for cannabis has undergone significant advancement recently, with several new states legalizing cannabis, as well as international movements, notably Germany's recent legalization, signaling a broader shift towards acceptance and regulation of cannabis. Specifically, in the last 12 months in the United States, Maryland, Minnesota, and Ohio have joined the growing list of states legalizing cannabis for recreational use. These developments not only expand the market for cannabis products, but also hint at broader implications for businesses operating within the industry. In the United States, there's growing optimism about the potential rescheduling of cannabis at the federal level, which could have a profound impact on commercial cultivators by eliminating the burden of Section 280E of the Internal Revenue Code on plant-touching businesses. As many of you know, this section of the code currently prohibits cannabis businesses from deducting ordinary business expenses through the federal classification of cannabis as a Schedule I drug under the Controlled Substance Act. Rescheduling would alleviate these tax burdens, significantly improving profitability for cannabis companies by allowing them to claim deductions like any other business. These changes present a landscape with many opportunities. As more states legalize cannabis and issue new cultivation licenses, the demand for hydroponic and gardening equipment and supplies will grow, directly benefiting Growjet's core business in supplying specialty hydroponic and organic gardening products at both the retail and wholesale levels. Internationally, developments like Germany's legalization have served as a catalyst for increased global demand for cultivation equipment and supplies, positioning growth generation to explore international expansion and export opportunities. Furthermore, rescheduling the U.S. could significantly enhance the operational efficiency and profitability of cannabis producers, allowing them to expand operations and invest more in cultivation infrastructure, further increasing demand for our products. Turning to guidance for full year 2024, we expect net revenue in the range of $205 million to $215 million, adjusted EBITDA in the range of a $2 million loss to a $3 million profit. As part of that, in the first quarter of 2024, we expect net revenue in the range of $45 million to $48 million, and adjusted EBITDA in the range of a $1 million loss to a $3 million loss. As we look forward to 2024, we continue to focus on controlling what we can't control and managing our business prudently. I believe the hard worker team continues to do on a daily basis is putting GrowGen in a position for long-term profitable growth in 2024 and beyond. With that, I will turn the call over to our CFO, Greg Sanders. Greg?