HYDROFARM HOLDINGS GROUP, INC. Q4 FY2023 earnings call

• Achieved positive adjusted EBITDA and positive free cash flow for full year 2023 despite lower sales levels. - Executed restructuring and cost savings initiatives including streamlining product portfolio, inventory reduction, working capital management, space utilization, and transportation/logistics cost reductions. - Proprietary nutrient brands saw sales growth, contributing to margin improvement and positive adjusted EBITDA in 2023. - Diversified revenue streams with international sales and non-cannabis CEA product sales increasing. - Industry potential catalysts include federal deschedule of cannabis, new US states legalizing adult-use cannabis, and Germany legalizing recreational cannabis.

In the fourth quarter, net sales were $47.2 million, down 23.2% year over year. For the full year 2023, sales fell short of guidance due to industry factors. Proprietary nutrient brands performed well with sales growth in both the fourth quarter and full year 2023 compared to 2022. International sales and non-cannabis CEA product sales increased to about 25% of total 2023 sales, up from 22% in the prior year. Consumable products represented approximately 74% of 2023 sales compared to 65% in 2022, and proprietary brands approached 60% of total net sales in the fourth quarter, the highest quarterly level since IPO.

• Expect net sales to decline low to high teens in 2024 with quarterly declines decelerating. - Anticipate an increase in adjusted gross profit margin due to improved sales mix and restructuring/cost-saving initiatives. - Expect adjusted EBITDA to be positive for the full year 2024, assuming improved adjusted gross profit margin and adjusted SG&A expense savings offset limited productivity investments. - Expect to generate positive free cash flow in 2024 and continue reducing working capital inventory levels. - Anticipate capital expenditures of approximately $4 million to $5 million in 2024.

• Industry softness in US specialty retail channel with retail stores and cultivation facilities closing due to regulatory challenges, reducing demand. - Dilution of third-party distributed brands across multiple supply points, impacting overall sales. - Uncertainty around federal regulation and guidance affecting industry confidence and investment.

Q: Your guidance implies low-teens to high-teens decline in revenue with flat EBITDA. Can you walk through how productivity/savings and mix contribute?

A: Improved sales mix with higher proprietary brands, restructuring and productivity initiatives in manufacturing, freight savings, and SG&A expense reductions including headcount, professional fees, etc., contribute.

Q: On visibility, guidance is below 2018 levels. What's your confidence in guidance and underlying drivers?

A: We believe we are at a bottom, with pre-bookings improving but dilution from distributor brands creating drag. We set guidance to be profitable at the lowest level and aim to beat it.

Q: How could federal descheduling help your business?

A: It could be a catalyst for confidence and sentiment, freeing up budgets for plant-touching businesses to invest, benefiting durable orders and the category overall.

Q: Regarding inventories, how much more can be reduced?

A: We've reduced inventory by close to $100 million in two years and aim to reduce further to manage on 90 days' worth of demand, with potential to take out another $15 million - $20 million.