Hydrofarm Holdings Group, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hydrofarm Holdings Group fourth quarter and fiscal year 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, March 5, 2025. I would now like to turn the call over to Anna Kate Heller at ICR to begin. Please go ahead.

Thank you and good morning. With me on the call today is John Lindeman, Hydrofarm's Chief Executive Officer, and Kevin O'Brien, the company's Chief Financial Officer. Bill Kohler, Executive Chairman of the Board, is also on the call. By now, everyone should have access to our fourth quarter and full year 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 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 John Lindemann.

Thank you, Anna Kate. Good morning, everyone. I'm pleased to be speaking with you on my first call in the capacity of CEO. The transition that occurred on January 1st of this year Before I begin, I want to thank Bill for his leadership over the past five years and his continued support in his role as executive chairman. Now, let me begin by stating that we made some notable improvements across the business in 2024, though the benefits from some of these improvements were masked by a challenging second half, particularly in the fourth quarter. Industry conditions weakened in the second half of 2024, marked by persistent oversupply challenges and further retail store closings across the sectors. This has resulted in lower sales across the supply chain, a trend we are seeing echoed across our industry peers. That said, I'm pleased to report that we finished the year with sales comfortably within our full-year outlook and successfully completed reductions in adjusted SG&A through our effective cost-saving and restructuring actions. Having said that, our 2024 adjusted EBITDA and free cash flow fell short of guidance due primarily to our fourth quarter performance. While it is seasonally our smallest quarter, fourth quarter sales came in softer than expected due to industry conditions. For quite some time, we have been clear that our strategic priority is driving the sales of our higher margin proprietary brands. This strategy has yielded positive results as we have improved our proprietary brand sales mix from approximately 35% in 2020 to 56% in 2024. This strategy has allowed us to operate profitably for the majority of quarters over the past two years, even as industry sales levels have compressed. In October and November, we saw our proprietary sales mix slip, which significantly pressured our profitability for the quarter and impacted our full-year results. As we detailed on previous calls, we invested in multiple new distributed brands, primarily in the spring of 2024, in an effort to position our product portfolio for growth. While our investment into these distributed brand partnerships helped our top line, they did weigh on our adjusted gross profit margin and free cash flow for the full year. We've since taken a number of actions to reemphasize our proprietary brand focus across the Hydrofarm platform and are now expecting an improvement in proprietary brand mix for the full year 2025. There were a number of positive developments in 2024 that we intend to further build upon this year. For example, in 2024, we saw strong performances from select proprietary consumable brands in the Grow Media and Nutrient categories. Specifically, full-year results for our Aurora Peat brand remained steady and proved again to be one of our most consistent brands. In addition, several of our other key proprietary consumable brands also had relatively strong year-on-year results. On the durable side, we saw outperformance from our proprietary active aqua brand. As I have mentioned, we are deeply focused on our proprietary offerings and will continue to strategically invest behind our key brands as we look to meet growers' evolving needs. We also will continue to innovate and evolve our portfolio and have a number of exciting new proprietary products on the docket for 2025. We also were encouraged by our e-commerce business in 2024 as U.S. sales for this channel increased over 25%. E-commerce has become a strong channel for home growing solutions, and we are committed to expand our presence and our capabilities in this space. Another area of focus has been to increase overall revenue diversity to help balance industry fluctuations. And in 2024, we achieved a nearly 200 basis point increase in our sales to non-cannabis and non-US Canadian customers. In 2025, we are planning to introduce several new products outside of the US and Canada. As a result of this action and others, we expect to further increase our non-cannabis and non-US Canadian sales mix again this year. Improving profitability by improving the efficiency of our manufacturing and distribution operations and by reducing our adjusted SG&A expense continues to be a top priority. While our profitability took a step back in the fourth quarter, we should not discount the significant progress we have made the past couple of years in several key areas. Since the beginning of 2023, we reduced our manufacturing footprint by nearly 60% and invested behind productivity enhancing capital equipment in our manufacturing operations. We also deliver 10 consecutive quarters of meaningful year-on-year adjusted SG&A savings and are now operating below our pre-IPO dollar cost. Looking ahead to 2025, we have a clear strategic roadmap focused on driving diverse, high-quality revenue streams, improving our profit margins, managing our financial position, and continuing to improve our overall capabilities. This starts with reinfigurating our proprietary brand sales mix through targeted marketing investments, enhanced Salesforce capabilities, refined incentive structures, and additional sales support infrastructure. To enhance our profit margins, we will further optimize our distribution network to align with current sales volume and pursue contract manufacturing opportunities to maximize our production capacity. To further support margin enhancement, we will also reduce our SG&A expenses in several areas, including professional and outside services, facility costs, and insurance. Managing free cash flow in our overall financial position will remain a priority. We believe there is room for improvement in this area with tighter working capital management since ERP integrations are now complete and AP software automation is near complete. While we cannot be certain on the timing of an overall industry recovery, we are certain that we will manage these initiatives. Lastly, before I turn it over to Kevin, I should reiterate that we also will focus on strategic alternatives that could enhance shareholder value. We continue to monitor the market for opportunities that serve to conform to our strategic priorities, complement our portfolio, and strengthen our business. This could be achieved either through a strategic combination or in the context of a potential acquisition or divestiture. With that, I'll hand it over to Kevin to further discuss the details of our fourth quarter financial results in our full year 2025 outlook.