Hydrofarm Holdings Group, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hydrofarm Holdings Group First Quarter 2025 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode, and the lines will be open for your question following the presentation. Please note that this conference is being recorded today, May 13, 2025. 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 John Lindeman, Hydrofarm's Chief Executive Officer, and Kevin O'Brien, the company's Chief Financial Officer. By now, everyone should have access to our first quarter 2025 earnings release in 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 hydrofarm.com. Before we begin our formal remarks, please note that our discussion today will include four 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 new risks and uncertainties that could cause actual results to differ materially from our current expectations. We refer all of you to our recent SV 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-doubt 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 Lindeman.

Thank you, Anna-Kate, and good morning, everyone. In the first quarter of 2025, we delivered promising sequential improvements across the business. Coming into the year, our first priority was to reemphasize the focus on our higher margin proprietary brands across the Hydrofarm platform to drive high quality revenue streams and improve profitability. We took a number of actions to help build momentum in these offerings. And as a result, compared to the challenging fourth quarter, our first quarter proprietary brand sales mix improved meaningfully to 55% from 52%, helping to drive a substantial sequential improvement in our adjusted gross profit margin. This also led to sequential growth and adjusted EBITDA in each month within the quarter. Our strategic initiative to drive sales in our proprietary brands has been effective in the past and allows us to operate profitably at compressed industry sales levels for many quarters over the past couple of years. While we have plenty more work to do to sustain and improve this statistic, we are encouraged by our first quarter result. I'd also like to call out a few additional bright spots from the quarter. First, we saw relatively strong year-on-year and sequential performance from several of our proprietary consumable brands in the nutrients and grow media categories. On the durable side, while the overall category had a difficult quarter, we saw year-on-year and sequential growth in one of our proprietary lighting brands. Collectively, the improvement in these areas helped to lift our proprietary brand mix against the fourth quarter of 2024. On the distributed side, we continue to benefit from incremental sales of the brands onboarded in the spring of 2024. With that said, distributed brands overall continue to weigh on our profit margins, and consistent with our strategic priorities, our focus will remain centered on our proprietary brands. In Q1, we also delivered our 11th consecutive quarter of meaningful adjusted SG&A expense savings. The roughly 11% expense savings versus last year were largely in people costs and facility expenses in conjunction with the integration and consolidation of our front and back offices conducted over the past 12 months. We were also off to a decent start in our non-cannabis and non-US Canadian sales mix, which accounted for more than a quarter of our total sales in Q1. We remain on pace this year to further improve upon the full-year metric that we achieved last year. One of our product sets that tends to skew towards non-cannabis applications is our peat moss business. And as a reminder, we harvest our peat moss in Canada, but the majority of the product is imported and sold into the United States. During the first quarter, the U.S. government flip-flopped on the products that qualify under Canadian import tariffs. Eventually, the government clarified in March that Canadian peat would be tariff-free as it had been for years prior as a qualified product under the USMCA agreement. During this period, we noticed our US customers pausing until there was clarity on the situation, which led to unpredictable ordering patterns within the quarter. With that behind us, we expect our peat business will pick up and further contribute to our diversification strategy. While our overall results were strong compared to the fourth quarter, we were hampered by prolonged industry oversupply challenges, lack of government progress on items such as rescheduling and safer banking, and continued consolidation across the retail customer base. While these conditions weighed on our year-over-year results, we were certainly not alone. In fact, we noticed among the public reporters in our space that for the first time since our IPO, Hydrofarm was the largest generator of hydroponic equipment and supplies revenue in the quarter. We would much prefer to see everyone across our industry prosper, but thought it was an interesting point nonetheless. Also of note is the current uncertainty surrounding tariffs. You've already heard me talk about the Q1 tariff situation with Aurora Peat, which we believe is behind us. As it relates to direct tariff exposure across our business, We source certain lighting and equipment products within our durables category from China, which account for an estimated low to mid-teens percentage of our net sales. Generally speaking, we maintain larger inventory positions in products sourced from overseas as the lead times are much longer than domestically sourced products. That said, we are actively engaged in renegotiations with existing vendors while also evaluating alternative cost-effective sourcing options. Our consumables business is much more insulated from the ongoing trade disputes, and as you know, consumables are both the largest and strongest part of our business. The tariff situation is rapidly evolving and remains very complex, as we witnessed from yesterday's announcement, effectively pausing the very high China tariffs for 90 days. As a result, it has become challenging to make any accurate forecasts on the impact of tariffs on our future performance, particularly within our durable products category. Although our Q1 performance was in line with our prior full-year guidance on all metrics except free cash below, with the continued tariff uncertainty on top of the prolonged industry challenges, we believe it is best to withdraw our full-year 2025 guidance for net sales, adjusted EBITDA, and free cash below at this time. We intend to provide an update once we have a clearer view on the impact of tariffs and the details behind our own reciprocal action plans. To support additional margin expansion while operating under the new tariff regime, we are conducting a thorough review of our product portfolio and distribution network to better align with estimated sales demand. We believe that streamlining our product set could further improve our gross profit margins and help us capture additional adjusted SG&A expense savings. As a reminder, we have a demonstrated track record of effective restructuring and costing actions that have reduced our manufacturing and distribution space by approximately 50%, improved full-year adjusted gross profit margins by several hundred basis points, and driven consistent adjusted SG&A expense savings since 2022. We have done this while simultaneously investing in productivity-enhancing capital equipment, which has strengthened our operational capabilities and helped us maintain exceptional customer service. While we cannot control the timing of future government action on either the tariff or industry front, We can and will continue to control our product portfolio, our manufacturing and distribution footprint, and our team's focus and capabilities. We will continue building on these positives we delivered in the first quarter and are committed to executing on these strategic priorities moving forward. I would like to reiterate one last point before handing it over to Kevin. We are in the process of actively pursuing strategic alternatives that are designed to enhance shareholder value. whether in the form of a potential acquisition, divestiture, or strategic combination. While we have nothing yet to report on this front, we will keep you in tune as and when appropriate. With that, I'll hand it over to Kevin to further discuss the details of our first quarter financial results.