Hydrofarm Holdings Group, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hydrofarm Holdings Group Second 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 questions following the presentation. Please note that this conference is being recorded today, August 12, 2025. I would now like to turn the call over to John DiDomenico 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 second 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 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 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 GAAP measures are available in our earnings release. With that, I would like to turn the call over to John Lindeman.

John, and good morning, everyone. During the second quarter, we delivered our 12th consecutive quarter of year-over-year adjusted SG&A savings. with a nearly 16% reduction in expenses compared to 2024. These substantial savings helped drive a small sequential improvement in adjusted EBITDA compared to the first quarter of this year, despite the tariff environment. Our disciplined approach to working capital management and inventory optimization also allowed us to deliver positive free cash flow for the quarter. We also took a significant step in the quarter with the initiation of a new restructuring plan to enhance our focus on higher margin brands and to further optimize our distribution and manufacturing network. We expect this initiative over the next several quarters to drive higher quality revenue streams and improve our level of profitability. Second quarter sales and sales mix came in softer than anticipated as industry headwinds continued to impact our top line performance. in particular on the durable side of our business. There continues to be oversupply challenges in the market, consolidation across the retail customer base, and minimal real progress made by the government on rescheduling and safer banking. These dynamics have led to inconsistent demand, most notably on the lighting and durable side of our business, which is heavily weighted towards proprietary brands. With that said, there are several positives to call out from a performance within the quarter. To start, we saw solid year-on-year performances on a relative basis from several of our proprietary consumable brands in the nutrients and grow media categories. And while the lighting and durable side of the business overall was very soft in Q2, we did see strong performance from our SunBlaster brand behind early results from our innovative and award-winning Nano and Halo plant lights. As part of this initiative to drive high-quality sales, We also have additional new branded products launching later this year. During the quarter, we also experienced positive performance in some of our newer distributed brands. Our team is excited to work with our distributed brand partners who are committed to aligning closely with us and investing behind their brands to support growth and deliver strong margin and cash flow characteristics. However, we are becoming increasingly selective And in our restructuring program announced today, we took the step to rationalize several distributed brands that do not fit those characteristics. We saw further progress in our non-cannabis and non-US Canadian sales mix during the quarter. Our international sales in particular performed well, improving year on year with nice results in select European and Asian countries. We remain on pace to improve upon the full year metric we achieved last year and continue to seek ways to diversify our revenue streams. Under our fully integrated ERP system, we have begun to realize improved working capital management, which helped to deliver positive free cash flow. Managing our free cash flow and our overall financial position remains a key area of focus for us, and we remain on pace to deliver positive free cash flow for the last nine months of 2025. We have made it clear that our top strategic priority is to drive diverse, high-quality revenue streams. After positive momentum in the first quarter of this year, which saw our proprietary brand sales mix improve to 55%, our mix softened in the second quarter due in large part to poor industry demand levels in the durables category. Behind our restructuring initiatives and select planned investments in the second half, We still expect to improve our proprietary mix and adjust the gross profit margin for the full year. Last quarter, we indicated that we would conduct a thorough review of our product portfolio and distribution network to better align with estimated sales demand in the current industry and tariff environment. In Q2, we completed that process and, as a result, initiated our new 2025 restructuring plan. This plan further streamlines our product portfolio and our manufacturing and distribution footprint. These actions include a large reduction in the number of SKUs and distributed brands that we will carry going forward. By trimming these underperforming products, we reduce our purchasing and warehousing complexity, reduce our space and personnel requirements, limit our working capital investment, and enable our sales team to focus their efforts on higher value brands. We estimate these actions collectively will result in annual cost savings in excess of $3 million, plus incremental improvements in working capital. And importantly, we expect approximately one-third of the total benefit to start showing through in the second half of 2025. Our strong history of impactful restructuring and cost-saving measures gives us confidence that we will, over time, realize these benefits. In the second half of 2025, we also plan to invest more in marketing behind new innovations, improve our brand websites, and further refine our internal CRM capabilities. All of these actions are oriented to drive higher quality revenue streams. I would like to give an update on the ongoing uncertain tariff environment. As a reminder, our primary tariff exposure is in our durables business, as we source certain lighting and equipment products from China. We typically maintain larger inventory positions and products sourced from overseas, and as such, we have not yet realized a dramatic impact from tariffs outside of approximately 300K of incremental costs year to date. We are managing our business to minimize the impacts from tariffs and are carefully purchasing from vendors abroad in situations where the incremental tariff costs can either be shared with our suppliers or passed on to customers in a limited manner. In addition, we have and will continue to enact pricing actions when necessary and where possible in an effort to preserve our margins. With all of that said, it's important to note that the largest part of our business is our consumables portfolio. and this business is mainly sourced from within the U.S. and Canada, albeit there is a portion sourced from other countries. We are increasingly focused on a proprietary consumables business, and with tariffs primarily affecting durables, it is logical for us to maintain that focus. We are executing what is within our control. We believe that by concentrating our efforts on a more optimized product portfolio and manufacturing and distribution footprint, we are positioned much better to drive diverse, high-quality revenue streams, improve profit margins, and strengthen our financial position. With that, I'll hand it over to Kevin to further discuss the details of our second quarter financial results and our new 2025 restructuring plan.