Hydrofarm Holdings Group, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hydrofarm third quarter earnings 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, November 7th, 2024. I would now like to turn the call over to Anna Kate Heller at ICR to begin.

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 third quarter 2024 earnings release and form 8K issued this morning, as well as an investor presentation available for reference. These documents are available in the investor section of Hydrofarm's website at hydrofarm.com. Before we begin our formal remarks, please know 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 condition. 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 gap 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. In the third quarter, we achieved solid year-on-year improvements in our gross profit margin and adjusted gross profit margin. Our continuing focus on our proprietary brands is yielding results, as they have increased as a percentage of our net sales, both in the quarter and year-to-date, providing a boost for our margins. We also continue to realize significant savings on the adjusted SG&A line through our effective cost savings and restructuring actions. Our net sales were seasonally weaker for us as industry challenges remain, and we have seen several large retailers close stores. With that said, we remain on track to hit our full year outlook on our key metrics. I'd now like to cover a number of the other bright spots in the third quarter. We saw strong performances from select proprietary consumable brands in the grow media and nutrient categories. Specifically in the quarter, we saw Aurora peat achieve significant year-over-year growth, while several of our key proprietary nutrient brands had solid results. On the durable side, we saw good performances on our proprietary active aqua and our photobio lighting brand. We will continue to strategically invest behind our key proprietary brands as we look to meet growers' evolving needs. Last quarter, we announced the distribution relationships or new distribution relationships with several partner brands, including Quest Dehumidifiers, Hurricane Fans, and Mills Nutrients. These new partner brands added to our top line in the third quarter. However, they did weigh a bit on our cash flow in the period. We remain optimistic about future performance for these partner brands, but we'll balance the upside of more sales with the inventory investments. We also saw progress in the diversification of our revenue sources. We continue to expand our international presence outside of the US and Canada, and continue to seek ways to drive non-cannabis sales, including CEA products sold into food, floral, lawn and garden, and certain other customer channels. As a percentage of sales are non-cannabis and non-US Canada, revenue sources increased several hundred basis points compared to Q3 last year. We are finding ways to become more diverse and less reliant on cannabis in the US and Canada. And we expect these revenue sources to be a greater percentage of sales this year than they were in 2023. Improving profitability remains a top priority, and we took more steps in the third quarter to integrate, consolidate, and optimize our manufacturing footprint as we drive productivity and cost efficiencies where possible. Notably, since the beginning of 2023, we have now reduced our manufacturing footprint by nearly 60%, and have reduced our total manufacturing and distribution space by almost 45%. Our actions have enhanced profitability and efficiency throughout our operations, and we have completed these initiatives while maintaining excellent customer service, on-time deliveries, and a customer-centric distribution footprint. A testament to the effectiveness of our cost savings and restructuring initiatives, we have now realized six consecutive quarters of adjusted gross profit margins at or above 23%, and nine consecutive quarters of meaningful year-on-year adjusted SG&A savings. And our absolute adjusted SG&A dollar cost is below our pre-IPO level. We've also achieved an increase in adjusted EBITDA for the nine months year to date. I'd like to give a quick update on the state of the industry. We continue to operate in a challenging environment as we move into the last quarter of 2024. With that said, there are some positive indicators, including actual growth in monthly cannabis users, the amount of actual cannabis being consumed. That continues across the country, which is encouraging. And according to 2023 National Survey, nearly 70% of adults consider cannabis as readily available, which is up significantly. This indicates a great runway or a massive runway for the future of our industry. One other source of encouragement continues to be the progressing regulatory environment for U.S. cannabis growers. The DEA has scheduled a hearing on December 2nd regarding their proposed reclassification of cannabis from Schedule 1 to Schedule 3, which would loosen restrictions on cannabis and help cash flow dynamics for licensed growers across legalized states. These positive developments would inject more life in the supply side of the industry and represent a step forward towards legalization of cannabis in the U.S., We are still optimistic demand for our products will turn around and deliver growth in the future. In the meantime, we have continued to show our ability to drive additional cost savings. Looking ahead with our strategic focus on our proprietary brands, revenue source diversification, and cost controls and related restructuring initiatives, we're confident that we are positioned for growth once demand and volume return to the industry. I am happy to reaffirm our full year 2024 guidance for net sales, adjusted EBITDA, and free cash flow. With that, I'll turn it over to John to talk about the details of the third quarter financial and further about our outlook for 2024. John?