Hydrofarm Holdings Group, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hydrofarm Holdings Group 4th 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, February 29, 2024. I would now like to turn the call over to Anna Kate Heller of ICR to begin. Please go ahead.

Thank you, and good morning. With me on the call today is Bill Toller, HydroFarm's Chairman and Chief Executive Officer, and John Lindeman, the company's Chief Financial Officer. By now, everyone should have access to our fourth quarter and full year 2023 earnings release in Form 8K issued this morning. These documents are available on the Investors 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 cause actual results to differ materially from our current expectations. We refer all of you to our recent SVD 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 is 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.

Thank you, Anna-Kate, and good morning, everyone. We achieved positive adjusted EBITDA and positive free cash flow for the full year 2023, as we had provided in our outlook. even at lower sales levels. Throughout 2023, our team worked very hard to execute our restructuring and related cost savings initiatives, which allowed us to achieve the improvement in several profitability metrics that we are reporting today, including adjusted growth profit, adjusted gross profit margin in 23 for both the fourth quarter and the full year. Our initiatives included streamlining our product portfolio to enable greater emphasis on our higher margin proprietary brands, continued focus on inventory reduction and overall working capital management, better space utilization in our distribution centers, and cost reductions in our transportation and logistics. Our cash balance, overall liquidity, and ability to generate positive free cash flow, as we have demonstrated in the last two fiscal years, give me confidence about where we are from a balance sheet perspective. On the top line, our 2023 sales fell short of our guidance range. due to several key factors. Fourth quarter sales were lower primarily due to industry softness in the U.S. specialty retail channel. You may hear from others in the industry that retail stores and cultivation facilities have been closing as the U.S. cannabis industry remains bogged down in regulatory challenges. These issues have led to an overall reduction in demand from retail stores and cultivation facilities. For example, regulators are enacting stronger enforcement in Oklahoma, and many facilities and stores are closing down as a result. We believe these changes will ultimately be good for the long-term health of our industry as the stronger players will consolidate and create a more stable market environment. There are a number of bright spots in 2023 that we will carry into 24 and continue to build on, which I'd like to highlight. Our proprietary nutrient brands continue to form well. In fact, sales grew in the fourth quarter and for the full year of 2023 when you compare them to 2022. Because proprietary nutrient brands is one of our higher margin product lines, The increased portion of sales mix helped to support margin improvement and also helped us to achieve positive adjusted EBITDA for 2023. Another area of focus in 2023 was to diversify our revenue streams. We have made progress in this area through both geographic and product diversity. Our international sales, which are to customers outside the U.S. and Canada, and non-Canada sales of CEA products sold into food, floral, Lawn and Garden, and certain other customers increased to about 25% of our total 2023 sales, up from 22% in the prior year. In 2024, we will continue to develop geographic and sales channel diversity. Hydroponic sales in the U.S. and Canada are still our core business, but the revenue diversity will help support us as we are navigating challenging industry dynamics. Several potential catalysts are on the horizon for the cannabis industry. The first is the possibility of federal descheduling. which should inject new life into the industry by reducing taxes on legal plant touching businesses, enabling them to reinvest. The Safer Banking Act should attract renewed investment from both institutional and retail players. And importantly, since the beginning of 2023, there are an additional seven US states that have legalized adult use cannabis, which means now there's an estimated 54% of US adults who live in a legalized state. Momentum is beginning to swing positively internationally as well, as Germany just legalized recreational cannabis use last week. We are confident that Hydroform will continue to navigate our path forward, and we are well positioned when the industry returns to growth. I'm very proud of the entire team at Hydroform for all their hard work this year in delivering a positive adjusted EBITDA and free cash flow in 2023. With that, I'll turn it over to John to discuss further details of the fourth quarter financial results and our outlook for 2024. John?