HYDROFARM HOLDINGS GROUP, INC. Q4 FY2024 earnings call

• Notable improvements across the business in 2024 despite a challenging second half, especially the fourth quarter. - Proprietary brand sales mix improved from ~35% in 2020 to 56% in 2024. - E-commerce U.S. sales increased over 25% in 2024. - Achieved nearly 200 basis point increase in sales to non-cannabis and non-U.S. Canadian customers in 2024. - Reduced manufacturing footprint by nearly 60% since early 2023 and delivered 10 consecutive quarters of meaningful year-on-year adjusted SG&A savings. - Strategic roadmap for 2025 includes reinvigorating proprietary brand sales mix, optimizing distribution network, reducing SG&A expenses, managing free cash flow, and exploring strategic alternatives.

In 2024, consumable products accounted for approximately three quarters of total sales, similar to 2023. Proprietary brand sales mix improved from around 35% in 2020 to 56% in 2024. However, proprietary brand mix slipped in the fourth quarter. Manufacturing operations are now concentrated in two U.S. locations plus a Canadian peat moss harvesting and processing facility. Canadian entities were integrated into the main ERP system, and business activities/reporting were reorganized into a single operating segment in the fourth quarter.

• Expect net sales to decline between 10% and 20% in 2025 compared to 2024. - Anticipate an increase in adjusted gross profit margin due to improved proprietary brand mix and restructuring/cost savings initiatives. - Adjusted EBITDA expected to be negative but an improvement compared to full year 2024. - Plan to further reduce adjusted SG&A in 2025 and improve free cash flow through working capital management and facility consolidations.

• Industry conditions with persistent oversupply challenges and retail store closings. - Potential impact of tariffs on sourcing and sales. - Regulatory changes affecting the cannabis industry that could impact operations and sales.

Q: Can you talk more about the broader market dynamics and when oversupply might be worked off?

A: Internal models expect double-digit sales declines early in 2025 that moderate as the year unfolds. Focus on key initiatives like improving proprietary brand mix, diversifying revenue streams, optimizing distribution center network, and driving SG&A savings. Completed ERP integrations provide better line of sight on working capital.

Q: What incremental benefits can we expect from cost-cutting initiatives in 2025?

A: Opportunity to further optimize distribution center network by expanding sublease/3PL relationships or consolidating DCs. Also, potential for more SG&A savings and manufacturing benefit from lab productivity initiatives. Working capital management improved due to ERP integrations.

Q: Thoughts on M&A and strategic moves?

A: Monitoring opportunities to enhance shareholder value, which could include tuck-in acquisitions, exploring assets within the business, or complete strategic combinations that diversify geographically or outside the cannabis space.