Hydrofarm Holdings Group, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hydrofarm Holdings Group First Quarter 2024 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 14, 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 first quarter 2024 earnings release and Form 8K issued this morning, as well as an investor presentation available for reference. 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'll 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.

Thank you, Anne and Kate, and good morning, everyone. I am pleased to report that in our first quarter, we delivered better results in many key profitability metrics. including adjusted gross profit margin, adjusted EBITDA, adjusted EBITDA margin, and free cash flow. In addition, March 2024 marked the fifth consecutive month of sequential net sales growth for Hydrofarm. That's the longest string of sequential monthly growth we have seen since our IPO in 2020. Second, we have now increased our adjusted gross profit margin on a year-over-year basis across the last five consecutive quarters. And we achieved positive adjusted EBITDA in three of the past four quarters, demonstrating our ability to continue to operate profitably during the industry downturn. While we are far from satisfied with the $2.7 million of positive adjusted EBITDA that we have reported over the last 12 months, it is clear that our cost savings and restructuring actions are making a difference. And when sales begin to increase, this volume will make an even larger impact on our bottom line. Our biggest opportunity is to continue to find new and unique ways to drive profitable growth. To accomplish that, we are innovating and expanding our brands to address growers' needs. For example, at the end of Q1, we launched a new and improved Photobio LED light designed specifically for commercial growing applications that offers 10% more light output, 47% less weight in the fixture, and increased efficacy, all at a 20% lower price than comparable models. While we were still in the early innings of this product innovation, we did see year-on-year growth on the photobio brand in Q1. Second, we continued to diversify our revenue stream by driving sales in our non-cannabis markets and broadening our geographic reach. In Q1, our non-cannabis and non-North American revenue sources increased to an estimated 32% of sales representing approximately a 360 basis point increase from the prior year. In addition to our diversification strategies, the regulatory environment is finally getting better for U.S. cannabis growers. It's improved and will help drive sales in the industry in the future. Recently, we all read the DEA will propose the reclassification of marijuana from a Schedule I to a Schedule III drug. a significant step in the process to legalize cannabis in the U.S. Separately, in April, we learned that the Florida Supreme Court will allow the state's voters to decide on the November ballot whether to legalize adult use marijuana or not in the state of Florida. These are good signs for our industry. While the financial metrics we just reported are central to this earnings call, I want to share a broader view of what I believe to be the beginning of a turn in the industry. I mentioned the five consecutive months of sequential sales growth. That's encouraging, but we're also seeing recent stabilization in our core U.S. business. Some of this is driven by innovation, like the previously mentioned Photobio LED lights, and some of it's simply that supply and demand are rebalancing across the country. Proprietary brands, including Grotech, Roots Organic, Gaia Green, and Photobio grew in Q1 compared to the prior year. Coupled with slight improvement in demand with our tight control on costs, including our adjusted SG&A being 24% lower in Q1 this year versus last, and we are well positioned for continued improvement in profitability as volume returns. We are reaffirming our full year guidance for net sales, adjusted EBITDA, and free cash flow as we remain focused on our brands, diversification of revenue, and improved mix in controlling and reducing costs. With that, I'll turn it over to John to further discuss the details of Q1 and our outlook for 2024. John?