Hydrofarm(HYFM) - 2024 Q2 - Quarterly Results

Executive Summary & Q2 2024 Highlights Hydrofarm reported Q2 2024 results, highlighting effective restructuring and cost savings, positive Adjusted EBITDA, and reaffirmed its full-year outlook Company Overview Hydrofarm Holdings Group, Inc. is a leading independent manufacturer and distributor of branded hydroponics equipment and supplies for controlled environment agriculture - Hydrofarm Holdings Group, Inc. is a leading independent manufacturer and distributor of branded hydroponics equipment and supplies for controlled environment agriculture[1] - The company announced its second quarter 2024 results, emphasizing that restructuring and cost savings initiatives continue to yield substantial expense reductions[1] - Hydrofarm reaffirmed its 2024 outlook on key metrics[1] Second Quarter 2024 Key Financial Highlights Hydrofarm reported a decrease in net sales and gross profit margins for Q2 2024 compared to the prior year, alongside an increase in net loss Q2 2024 Financial Highlights vs. Prior Year Period | Metric | Q2 2024 (Millions) | Q2 2023 (Millions) | Change (%) | | :------------------------- | :----------------- | :----------------- | :--------- | | Net sales | $54.8 | $63.1 | -13.1% | | Gross Profit Margin | 19.8% | 23.0% | -3.2 pp | | Adjusted Gross Profit Margin | 24.4% | 27.0% | -2.6 pp | | Net loss | $(23.5) | $(12.9) | +82.2% | | Adjusted EBITDA | $1.7 | $2.5 | -32.0% | | Cash from operating activities | $3.8 | N/A | N/A | | Free Cash Flow | $3.4 | N/A | N/A | - Completed the previously announced IGE Asset Sale in May 2024[2][3] CEO Commentary CEO Bill Toler highlighted the effectiveness of restructuring and cost savings, evidenced by positive Adjusted EBITDA for the fourth time in five quarters - Delivered positive Adjusted EBITDA for the fourth time in the last five quarters, demonstrating the effectiveness of restructuring and cost savings[4] - Increased Adjusted Gross Profit Margin sequentially by strategically focusing on higher margin proprietary brands and enhancing operational efficiency[4] - Optimized manufacturing footprint by streamlining and consolidating operations, expected to result in additional cost savings through increased utilization and productivity[4] - Expressed excitement about potential industry demand tailwinds, particularly the possible rescheduling of cannabis, despite the current soft industry conditions[4] Second Quarter 2024 Financial Performance Q2 2024 saw decreased net sales and gross profit due to industry oversupply, but significant reductions in SG&A expenses partially offset an increased net loss from an asset sale Net Sales and Gross Profit Net sales for Q2 2024 decreased by 13.1% year-over-year, primarily due to a 10.3% decline in volume/mix of products sold, attributed to an oversupply in the cannabis industry Q2 2024 Net Sales and Gross Profit | Metric | Q2 2024 (Millions) | Q2 2023 (Millions) | Change (%) | | :------------------------- | :----------------- | :----------------- | :--------- | | Net sales | $54.8 | $63.1 | -13.1% | | Gross profit | $10.9 | $14.5 | -24.9% | | Gross Profit Margin | 19.8% | 23.0% | -3.2 pp | | Adjusted Gross Profit | $13.3 | $17.0 | -21.7% | | Adjusted Gross Profit Margin | 24.4% | 27.0% | -2.6 pp | - The decrease in net sales was mainly due to a 10.3% decline in volume/mix of products sold, primarily related to an oversupply in the cannabis industry[5] - Gross Profit Margin and Adjusted Gross Profit Margin decreased primarily due to lower productivity in select manufacturing facilities[5] Operating Expenses (SG&A) Selling, general and administrative (SG&A) expense and Adjusted SG&A expense both saw a 20% reduction year-over-year in Q2 2024 Q2 2024 SG&A Expenses | Metric | Q2 2024 (Millions) | Q2 2023 (Millions) | Change (%) | | :----------------- | :----------------- | :----------------- | :--------- | | SG&A expense | $18.7 | $23.5 | -20.4% | | Adjusted SG&A expense | $11.6 | $14.6 | -20.5% | - The 20% cost reduction in SG&A and Adjusted SG&A expense was primarily due to a decrease in compensation costs from headcount, facilities cost, professional fees, and insurance cost, aided by restructuring actions[5] Net Loss and Adjusted EBITDA Net loss increased significantly in Q2 2024 to $23.5 million, primarily due to an $11.5 million non-cash loss from the IGE Asset Sale Q2 2024 Net Loss and Adjusted EBITDA | Metric | Q2 2024 (Millions) | Q2 2023 (Millions) | Change (%) | | :----------------- | :----------------- | :----------------- | :--------- | | Net loss | $(23.5) | $(12.9) | +82.2% | | Diluted EPS | $(0.51) | $(0.28) | +82.1% | | Adjusted EBITDA | $1.7 | $2.5 | -32.0% | - The increase in net loss was due to an $11.5 million primarily non-cash loss recorded upon completion of the IGE Asset Sale[5] - The IGE Asset Sale and new exclusive supply agreement are expected to lower fixed costs and improve profitability on future sales of proprietary branded IGE products[5] - Adjusted EBITDA reduction is related to lower Adjusted Gross Profit partly offset by lower Adjusted SG&A expense[6] Financial Position and Liquidity As of June 30, 2024, Hydrofarm maintained a stable cash position, significant borrowing capacity, and compliance with debt covenants, while generating positive cash flow Balance Sheet Overview As of June 30, 2024, Hydrofarm maintained a stable cash position and significant borrowing capacity Balance Sheet Highlights (as of June 30, 2024) | Metric | Amount (Millions) | | :--------------------------- | :---------------- | | Cash | $30.3 | | Available Revolving Credit Facility | ~$20 | | Term Loan outstanding | $120.2 | | Finance leases | $8.5 | | Other debt | $0.1 | - The Company has maintained a zero balance on its Revolving Credit Facility during 2024 and 2023[6] - Hydrofarm is in compliance with debt covenants as of June 30, 2024[6] Cash Flow and Liquidity Hydrofarm generated positive net cash from operating activities and Free Cash Flow in Q2 2024 Q2 2024 Cash Flow Highlights | Metric | Q2 2024 (Millions) | | :----------------------------- | :----------------- | | Net cash from operating activities | $3.8 | | Capital expenditures | $(0.4) | | Free Cash Flow | $3.4 | - Free Cash Flow decreased from the same period last year, primarily due to working capital changes, including from the Company's recent inventory investment in new distribution relationships[7] Full Year 2024 Outlook Hydrofarm reaffirmed its 2024 outlook, projecting positive Adjusted EBITDA and Free Cash Flow despite anticipated net sales decline, driven by cost savings and improved margins Reaffirmed Outlook on Key Metrics Hydrofarm reaffirmed its full-year 2024 outlook, expecting net sales to decrease in the low to high teens, while projecting positive Adjusted EBITDA and Free Cash Flow - Net sales to decrease low to high teens in percentage terms[7] - Adjusted EBITDA that is positive[7] - Free Cash Flow that is positive[7] - Improved year-over-year Adjusted Gross Profit Margin resulting primarily from cost savings associated with restructuring actions and related productivity initiatives, and minimal non-restructuring inventory reserves[7] - Reduced year-over-year Adjusted SG&A expense primarily from the full-year benefit of headcount reductions completed in 2023 and reductions in professional fees, facilities, and insurance expenses[7] - Reduction in inventory and net working capital helping to generate positive Free Cash Flow for the full year[7] Updated Assumptions Hydrofarm updated its capital expenditure assumption for 2024, revising it downwards from previous expectations Updated Capital Expenditure Outlook | Metric | Prior Expectation (Millions) | Updated Expectation (Millions) | | :----------------- | :--------------------------- | :----------------------------- | | Capital expenditures | $4.0 to $5.0 | $3.5 to $4.5 | Company Information & Forward-Looking Statements This section provides details on Hydrofarm's Q2 2024 conference call, company background, and a cautionary note regarding forward-looking statements and associated risks Conference Call and Presentation Hydrofarm hosted a conference call on August 8, 2024, to discuss its Q2 2024 financial results, featuring Chairman and CEO Bill Toler and CFO John Lindeman - Hydrofarm hosted a conference call on August 8, 2024, at 8:30 a.m. Eastern Time to discuss Q2 2024 financial results[9] - The call was hosted by Bill Toler (Chairman and CEO) and John Lindeman (CFO)[9] - An investor presentation is available on the Hydrofarm investor relations website[9] About Hydrofarm Holdings Group, Inc. Hydrofarm is a leading independent manufacturer and distributor of hydroponics equipment and supplies for controlled environment agriculture, with over 40 years of experience - Hydrofarm is a leading independent manufacturer and distributor of branded hydroponics equipment and supplies for controlled environment agriculture, including grow lights, climate control solutions, growing media, and nutrients[10] - With over 40 years of experience, Hydrofarm aims to make growing easier and more productive[10] - The company's mission is to empower growers, farmers, and cultivators with products that enable greater quality, efficiency, consistency, and speed in their grow projects[10] Cautionary Note Regarding Forward-Looking Statements This section warns that statements about future events, financial performance, and management plans are forward-looking and subject to risks and uncertainties - Forward-looking statements are subject to risks and uncertainties, and actual results could differ materially[11] - Key risks include: * Adverse industry conditions (oversupply, decreasing prices in end-customer products) * Potential for additional impairment charges, inventory, and accounts receivable reserves, and liquidity challenges if conditions worsen * Interruptions in the Company's supply chain * Inability to meet Nasdaq listing standards * Restructuring activities potentially increasing expenses and not achieving intended cost savings * Highly competitive markets affecting revenue growth * Varying, inconsistent, and rapidly changing laws and regulations in emerging industries like cannabis * Damage to reputation, IT system failures, data breaches, or cyber-attacks * Inability to adequately protect intellectual property * Operating and integration difficulties from acquisitions, strategic alliances, and investments[11][12] Condensed Consolidated Financial Statements (Unaudited) Unaudited financial statements for Q2 2024 show decreased net sales and gross profit, reduced operating expenses, and an increased net loss due to an asset disposition Condensed Consolidated Statements of Operations The unaudited condensed consolidated statements of operations show a decline in net sales and gross profit for both the three and six months ended June 30, 2024, compared to the prior year Condensed Consolidated Statements of Operations (Unaudited) | Metric (in thousands) | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :----------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net sales | $54,793 | $63,051 | $108,965 | $125,229 | | Cost of goods sold | 43,942 | 48,578 | 87,189 | 99,375 | | Gross profit | 10,851 | 14,473 | 21,776 | 25,854 | | Selling, general and administrative | 18,659 | 23,468 | 38,280 | 47,899 | | Loss on asset disposition | 11,520 | — | 11,520 | — | | Loss from operations | (19,328) | (8,995) | (28,024) | (22,045) | | Interest expense | (3,811) | (3,768) | (7,742) | (7,460) | | Other income (expense), net | 79 | (420) | 294 | (380) | | Loss before tax | (23,060) | (13,183) | (35,472) | (29,885) | | Income tax (expense) benefit | (390) | 318 | (586) | 171 | | Net loss | $(23,450) | $(12,865) | $(36,058) | $(29,714) | | Net loss per share: Basic | $(0.51) | $(0.28) | $(0.79) | $(0.66) | | Net loss per share: Diluted | $(0.51) | $(0.28) | $(0.79) | $(0.66) | Condensed Consolidated Balance Sheets The unaudited condensed consolidated balance sheets show a decrease in total assets and total liabilities from December 31, 2023, to June 30, 2024 Condensed Consolidated Balance Sheets (Unaudited) | Metric (in thousands) | June 30, 2024 | December 31, 2023 | | :--------------------------------- | :------------ | :---------------- | | Assets | | | | Cash and cash equivalents | $30,314 | $30,312 | | Accounts receivable, net | 18,565 | 16,890 | | Inventories | 58,719 | 75,354 | | Total current assets | 111,655 | 128,066 | | Property, plant and equipment, net | 41,111 | 47,360 | | Intangible assets, net | 261,201 | 275,881 | | Total assets | $463,358 | $507,643 | | Liabilities | | | | Accounts payable | $13,801 | $12,613 | | Total current liabilities | 35,482 | 37,652 | | Long-term debt | 114,948 | 115,412 | | Total liabilities | 208,349 | 217,033 | | Stockholders' equity | | | | Total stockholders' equity | 255,009 | 290,610 | Reconciliation of Non-GAAP Measures & Definitions This section provides detailed reconciliations and definitions for non-GAAP financial measures, including Adjusted Gross Profit, Adjusted SG&A, Adjusted EBITDA, and Free Cash Flow Adjusted Gross Profit Reconciliation Adjusted Gross Profit for Q2 2024 was $13.3 million, with an Adjusted Gross Profit Margin of 24.4%, reflecting adjustments for depreciation, depletion, amortization, and restructuring expenses Adjusted Gross Profit Reconciliation (Unaudited) | Metric (in thousands) | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :----------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Gross Profit (GAAP) | $10,851 | $14,473 | $21,776 | $25,854 | | Depreciation, depletion and amortization | 1,608 | 1,826 | 3,257 | 3,281 | | Restructuring expenses | 890 | 720 | 981 | 1,957 | | Adjusted Gross Profit (Non-GAAP) | $13,349 | $17,019 | $26,014 | $31,092 | | Gross Profit Margin (GAAP) | 19.8% | 23.0% | 20.0% | 20.6% | | Adjusted Gross Profit Margin (Non-GAAP) | 24.4% | 27.0% | 23.9% | 24.8% | Adjusted SG&A Reconciliation Adjusted SG&A for Q2 2024 was $11.6 million, representing 21.2% of net sales, a decrease from the prior year Adjusted SG&A Reconciliation (Unaudited) | Metric (in thousands) | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :----------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Selling, general and administrative (GAAP) | $18,659 | $23,468 | $38,280 | $47,899 | | Depreciation, depletion and amortization | 6,168 | 6,424 | 12,404 | 12,976 | | Restructuring expenses | 37 | 68 | 84 | 242 | | Stock-based compensation | 769 | 1,819 | 1,637 | 3,026 | | Severance and other | 61 | 589 | 195 | 884 | | Adjusted SG&A (Non-GAAP) | $11,624 | $14,568 | $23,960 | $30,771 | | SG&A (GAAP) as a percent of net sales | 34.1% | 37.2% | 35.1% | 38.2% | | Adjusted SG&A (Non-GAAP) as a percent of net sales | 21.2% | 23.1% | 22.0% | 24.6% | Adjusted EBITDA Reconciliation Adjusted EBITDA for Q2 2024 was $1.7 million, or 3.1% of net sales, a decrease from $2.5 million (3.9% of net sales) in the prior year Adjusted EBITDA Reconciliation (Unaudited) | Metric (in thousands) | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :----------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss (GAAP) | $(23,450) | $(12,865) | $(36,058) | $(29,714) | | Interest expense | 3,811 | 3,768 | 7,742 | 7,460 | | Income tax expense (benefit) | 390 | (318) | 586 | (171) | | Depreciation, depletion and amortization | 7,776 | 8,250 | 15,661 | 16,257 | | Restructuring expenses | 927 | 788 | 1,065 | 2,199 | | Stock-based compensation | 769 | 1,819 | 1,637 | 3,026 | | Severance and other | 61 | 589 | 195 | 884 | | Other (income) expense, net | (79) | 420 | (294) | 380 | | Loss on asset disposition | 11,520 | — | 11,520 | — | | Adjusted EBITDA (Non-GAAP) | $1,725 | $2,451 | $2,054 | $321 | | Net loss (GAAP) as a percent of net sales | (42.8)% | (20.4)% | (33.1)% | (23.7)% | | Adjusted EBITDA (Non-GAAP) as a percent of net sales | 3.1% | 3.9% | 1.9% | 0.3% | Free Cash Flow Reconciliation Free Cash Flow for Q2 2024 was $3.4 million, derived from net cash from operating activities less capital expenditures Free Cash Flow Reconciliation (Unaudited) | Metric (in thousands) | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :----------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net cash from operating activities (GAAP) | $3,784 | $9,911 | $1,487 | $961 | | Capital expenditures of Property, plant and equipment (GAAP) | (368) | (1,653) | (1,810) | (3,306) | | Free Cash Flow (Non-GAAP) | $3,416 | $8,258 | $(323) | $(2,345) | Notes to Non-GAAP Reconciliations This section provides detailed explanations for the adjustments made in the non-GAAP reconciliations - Restructuring expenses for Q2 2024 primarily related to manufacturing facility consolidations and charges incurred to relocate and terminate certain facilities[17] - Severance and other charges for Q2 2024 primarily related to estimated legal costs for certain litigation and severance charges[18] - Loss on asset disposition for Q2 2024 relates to the IGE Asset Sale[18] - The IGE Asset Sale contributed an estimated $3.5 million to Net cash from operating activities and Free Cash Flow during the three and six months ended June 30, 2024, after partially offsetting cash paid to terminate the associated facility lease and cash transaction costs[19] Non-GAAP Financial Measures Definitions This section defines the non-GAAP financial measures used by Hydrofarm, including Adjusted EBITDA, Adjusted Gross Profit, Adjusted SG&A, Free Cash Flow, Liquidity, and Net Debt - Adjusted EBITDA (non-GAAP) is defined as net loss (GAAP) excluding interest expense, income taxes, depreciation, depletion and amortization, stock-based compensation, restructuring charges, and other non-cash, unusual and/or infrequent costs (e.g., impairments, severance, loss on asset disposition)[22] - Adjusted Gross Profit (non-GAAP) is defined as gross profit (GAAP) excluding depreciation, depletion, and amortization, restructuring charges, and other non-cash, unusual and/or infrequent costs[23] - Adjusted SG&A (non-GAAP) is defined as SG&A (GAAP) excluding depreciation, depletion, and amortization, stock-based compensation, restructuring charges, and other non-cash, unusual and/or infrequent costs[23] - Free Cash Flow (non-GAAP) is defined as Net cash from (used in) operating activities less capital expenditures for property, plant and equipment[24] - Liquidity is defined as total cash, cash equivalents and restricted cash, plus available borrowing capacity on the Revolving Credit Facility[24] - Net Debt is defined as total debt principal outstanding plus finance lease liabilities, less cash, cash equivalents and restricted cash[25]