Hydrofarm Holdings Group, Inc.

ladies and gentlemen and thank you for standing by welcome to the hydro farm holdings group first quarter 2023 earnings conference call at this time all participants have been placed in a listen only mode and the lines will be open for your questions following the presentation please note that this conference is being recorded today may 10 2023 I would now like to turn the call over to Anna Kate Heller of ICR to begin.

Thank you and good afternoon. With me on the call today is Bill Toler, Hydrofarm's Chairman and Chief Executive Officer, and John Lindeman, the company's Chief Financial Officer. By now, everyone should have access to our first quarter 2023 earnings release and Form 8K issued today after market close. These documents are available on the Investor section of Hydrofarm's website at www.hydrofarm.com. Before we begin our formal remarks, please note that our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from our current expectations. 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 conditions. 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 a 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 Bill Toller.

Great. Thank you, Anna Kate, and good afternoon, everyone. During the first quarter, we continued to see signs of stabilization in the industry as we saw our first quarter sales increased sequentially from Q4 2022 to Q1 2023. We remain focused on controlling and cutting costs at Hydrofarm, including rightsizing our business, making operations as efficient as possible, and managing for profitability. We are seeing positive industry signals, which I'll talk about more shortly, and we're confident that the industry will return to growth. I am proud of the hard work done by the entire team at Hydrofarm to shape our business into a leaner and stronger organization. We appreciate the work our team has done. These actions have us better positioned than ever to take advantage of growth opportunities that lie ahead. I'll point to a few of the key accomplishments during the quarter. I'll discuss the positive signs as well as the challenges that we are currently seeing. We continue to execute on our previously announced restructuring initiative. We completed the consolidation of our Canadian nutrient manufacturing facility, the closing of our regional office in China, as well as the relocation of our distribution center in Western Canada. In January, we completed the sale leaseback of our property in Eugene, Oregon, which serves as a location for the manufacturing and processing for some of our Grow Media and Nutrient brands. We received a little over $8 million in net proceeds from the transaction. Turning to a recent achievement regarding innovation, one of our core brands I'm really thrilled to talk about. On April 20th, we officially launched our newest house and garden powder product line. It is a dry nutrient lineup aimed toward commercial growers that was built around our highly reputable premium brand house and garden. An early player in the industry and an industry leader in the nutrient category. Based on professional field trials in a controlled environment, our new house and garden commercial powders produced more yield and higher plant quality than any of the other tested alternatives. We are excited about our team's ability to innovate on our core brands and offer value-added solutions for our retail customers and our commercial customers. Turning to industry dynamics, in Q1, we experienced relative strength from our specialty retail customers, especially in the western states. I'd like to note that in California, historically our largest ship-to state, it was up sequentially in dollar sales, when you compare Q4 of last year to Q1 of this year. We're also seeing strength in APP, our Aurora Peak brand, which has a diverse customer base and also serves non-cannabis channels. This brand grew double digits on a year-on-year basis in the first quarter. We're excited to see the improvement in APP and our specialty retail in the West. One of our challenges we faced in the quarter was that some commercial customers delayed builds and new projects. As a result, our commercial sales in Q1 fell short of expectations. This is primarily due to the ongoing legislative battles and, frankly, lack of cohesive legislative support that has been slowing implementations in key states like New York, New Jersey, Connecticut, Mississippi. As we have previously said, for us to achieve our guidance, top line guidance for the year, we need a modest seasonal lift in the spring. We also need to close some of those commercial opportunities in front of us. Now, as we sit here in early May, we have just recently seen a lift in our daily sales. This seasonal uptick needs to continue and increase through the remainder of Q2 and into the back half in order for us to achieve our top line guidance. In summary, we are laser focused on driving profitability and executing our strategy. As a result of our actions, we're already seeing some benefits as evidenced by our sequential, and year-over-year improvement in adjusted gross margin, profit margin. We will continue to execute on key initiatives, which include driving a more favorable sales mix by selling and focusing on high-margin products, diversifying revenue stream by further expanding our sales efforts in the non-cannabis channels, including CEA Food and Floral in Vaughan and Garden, increasing productivity across all of our manufacturing and distribution centers, generating cost savings by continually reexamining the size and scope of our organization relative to the current industry demand levels, and, of course, reducing our working capital. I'm encouraged by our team's discipline and execution during the quarter. The margin improvement we saw in the first quarter is a testament to the success of the recent actions, which have put us in a stronger position in 2023 and beyond. With that, let me turn it over to John, who will discuss the details of our first quarter financial results and outlook for 2023. John?