Hydrofarm Holdings Group, Inc. Q2 FY2024 earnings call

• Sequential improvement in adjusted gross profit margin from first quarter levels and positive adjusted EBITDA for the fourth time in five quarters.
• Substantial savings in adjusted SG&A year on year. Year-to-date adjusted EBITDA over $2 million, up from ~$300,000 in 2023, and smallest year-over-year net sales decline in three years.
• Took steps to integrate and optimize manufacturing operations: closed sale of IGE branded products' manufacturing equipment and inventory, closed Paramount California facility, ceased production at Goshen, NY grow media facility, and further right-sized Northern California facility.
• Proprietary brands like PHOTOBIO performed well due to new lighting innovations. Entered new distribution relationships with vendors like Quest, Dehumidifiers, etc.
• Optimistic about cannabis regulatory environment with DEA's reclassification proposal and over 90% of comments in favor of rescheduling.

Consumable products make up more than three quarters of total sales, representing approximately 76% of total sales in Q2 2024, similar to Q2 2023. Proprietary brands including Active Aqua, PHOTOBIO, and Roots Organic performed well year on year. Non-cannabis and non-US and Canada revenue sources as a percentage of sales remained stable relative to Q2 2023. Gross profit in Q2 was $10.9 million compared to $14.5 million in the year-ago period. Adjusted gross profit was $13.3 million or 24.4% of net sales, down from 27% in the year-ago period but still the third highest since IPO and fifth consecutive quarter with at least 23% adjusted gross profit margin.

• Reaffirmed full-year 2024 guidance: net sales to decline low to high teens, adjusted EBITDA positive for full-year, and free cash flow positive.
• Capital expenditures revised to $3.5 million to $4.5 million for full-year 2024, down slightly from $4 to $5 million previously.
• Expect full-year 2024 adjusted gross profit margin to be higher than 2023.

• Cannabis industry oversupply impacting volume mix.
• Promotional pricing activity leading to pricing decline expected to continue in 2024.
• Regulatory uncertainties regarding cannabis reclassification and its impact on the business.

Q: Wanted to ask about demand trends in the quarter, specifically May being the seventh consecutive month of sequential growth and how underlying revenue progressed through the quarter and industry impact.

A: May was seventh consecutive month of sequential growth, but June didn't continue. Durable products like Active Aqua and PHOTOBIO showed year-over-year growth. Lapped strong international shipments in June on consumable brands. Demand signs stable with mix change toward durables.

Q: Follow-up on top line progression, guidance range, and phasing of Q3 vs Q4.

A: First half right at ~13% decline, trending at better end of guidance range. Typically stronger profitability in Q3 than Q4 due to seasonality, expecting stronger margin in second half.

Q: Question on Ohio production ramp, benefit from it, and persistence.

A: Ohio has been strong, good people and relationships there. New states benefit durable side first. Shift toward Midwest and Mid-Atlantic states, but California still under pressure.

Q: Question on cost cutting cycle, progress, and room for more savings.

A: Trailing 12-month adjusted gross profit margin up 540 basis points year-over-year. Took $17.1 million out of adjusted SG&A. Opportunity to expand adjusted gross profit margin further with proprietary brands and top line energy.