Hydrofarm(HYFM) - 2023 Q4 - Annual Results

Financial Performance Summary Fourth Quarter 2023 Highlights Q4 2023 net sales decreased to $47.2 million, but profitability significantly improved with positive gross profit and narrowed net loss Q4 2023 vs. Q4 2022 Financial Highlights | Metric | Q4 2023 | Q4 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $47.2M | $61.5M | -23.2% | | Gross Profit (Loss) | $8.4M | $(0.5)M | Improvement | | Gross Profit Margin | 17.9% | (0.8)% | +18.7 p.p. | | Adjusted Gross Profit | $11.5M | $9.0M | +27.8% | | Adjusted Gross Profit Margin | 24.3% | 14.7% | +9.6 p.p. | | Net Loss | $(15.2)M | $(35.3)M | Improvement | | Adjusted EBITDA | $(0.6)M | $(8.4)M | Improvement | Full Year 2023 Highlights FY2023 net sales declined to $226.6 million, yet operational improvements yielded positive Adjusted EBITDA and Free Cash Flow, significantly reducing net loss Full Year 2023 vs. 2022 Financial Highlights | Metric | FY 2023 | FY 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $226.6M | $344.5M | -34.2% | | Gross Profit | $37.6M | $29.3M | +28.3% | | Gross Profit Margin | 16.6% | 8.5% | +8.1 p.p. | | Adjusted Gross Profit | $55.0M | $48.2M | +14.1% | | Adjusted Gross Profit Margin | 24.3% | 14.0% | +10.3 p.p. | | Net Loss | $(64.8)M | $(285.4)M | Improvement | | Adjusted EBITDA | $0.3M | $(21.2)M | Improvement | | Free Cash Flow | $2.8M | $13.8M (from reconciliation) | -79.7% | Management Commentary Management noted restructuring and cost-saving initiatives achieved positive Adjusted EBITDA and Free Cash Flow in 2023, with more savings expected in 2024 - Restructuring and cost savings efforts led to positive Adjusted EBITDA and Free Cash Flow in 2023[6] - The company improved margins, increased its cash balance, and decreased inventory levels through aggressive working capital management[6] - Revenue base became more diverse through penetration into non-US/Canada geographies and non-cannabis CEA applications[6] - A second phase of the restructuring strategy is underway, focused on the durables business, with expectations of additional cost savings in 2024[6] Detailed Financial Analysis Fourth Quarter 2023 Financial Results Q4 2023 net sales fell to $47.2 million due to volume decline and price/mix impact, but gross profit significantly improved, and net loss was reduced - Net sales decreased to $47.2 million, primarily due to an 18.7% decline in sales volume related to oversupply in the cannabis industry and a 4.5% decrease in price/mix[8] - Gross profit increased to $8.4 million (17.9% margin) due to lower restructuring charges, a higher proportion of proprietary brand sales, lower freight costs, and improved productivity[10] - SG&A expense decreased to $19.9 million, and Adjusted SG&A fell to $12.0 million, primarily due to reduced compensation costs, lower accounts receivable reserves, and decreased professional fees[10] - The company initiated a second phase of its restructuring plan, incurring $1.3 million in charges in Q4 2023, mainly for non-cash inventory write-downs related to facility consolidations[9] Balance Sheet, Liquidity and Cash Flow As of December 31, 2023, Hydrofarm maintained a strong cash position and compliance with debt covenants, generating positive Free Cash Flow for the full year - As of December 31, 2023, the Company had $30.3 million in cash and approximately $22 million of available borrowing capacity on its Revolving Credit Facility[11] - The company was in compliance with debt covenants as of December 31, 2023, and maintained a zero balance on its Revolving Credit Facility throughout 2023[11] Cash Flow Summary | Metric | Q4 2023 | Full Year 2023 | | :--- | :--- | :--- | | Cash from Operating Activities | $(1.6)M | $7.0M | | Capital Expenditures | $(0.2)M | $(4.2)M | | Free Cash Flow | $(1.7)M | $2.8M | Full Year 2024 Outlook The company anticipates positive Adjusted EBITDA and Free Cash Flow in 2024, driven by continued cost savings and working capital management, despite projected net sales decline Full Year 2024 Guidance | Metric | Outlook | | :--- | :--- | | Net Sales | Decrease low to high teens % | | Adjusted EBITDA | Positive | | Free Cash Flow | Positive | | Capital Expenditures | Approx. $4.0M to $5.0M | - The 2024 outlook is based on several assumptions[13][17] - Improved Adjusted Gross Profit Margin: Driven by cost savings from restructuring and an expectation of minimal non-restructuring inventory reserves[17] - Reduced Adjusted SG&A: Resulting from the full-year benefit of 2023 headcount reductions and lower professional, facilities, and insurance expenses[17] - Positive Free Cash Flow Generation: Aided by reductions in inventory and net working capital[17] Financial Statements Condensed Consolidated Statements of Operations For FY2023, the company significantly reduced its net loss to $(64.8) million, driven by increased gross profit and reduced operating expenses, despite lower net sales Consolidated Statements of Operations (in thousands) | Metric | Twelve months ended Dec 31, 2023 | Twelve months ended Dec 31, 2022 | | :--- | :--- | :--- | | Net sales | $226,581 | $344,501 | | Gross profit | $37,612 | $29,336 | | Selling, general and administrative | $87,314 | $118,604 | | Impairments | $— | $192,328 | | Loss from operations | $(49,702) | $(281,596) | | Net loss | $(64,813) | $(285,415) | | Net loss per share, diluted | $(1.42) | $(6.35) | Condensed Consolidated Balance Sheets As of December 31, 2023, total assets decreased to $507.6 million, primarily due to reduced inventories, while cash and cash equivalents increased Consolidated Balance Sheets (in thousands) | Metric | December 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $30,312 | $21,291 | | Inventories | $75,354 | $111,398 | | Total current assets | $128,066 | $154,948 | | Total assets | $507,643 | $573,559 | | Liabilities and Stockholders' Equity | | | | Total current liabilities | $37,652 | $41,605 | | Long-term debt | $115,412 | $117,461 | | Total liabilities | $217,033 | $223,678 | | Total stockholders' equity | $290,610 | $349,881 | Reconciliation of Non-GAAP Measures Reconciliation of Adjusted Gross Profit Adjusted Gross Profit for FY2023 increased to $55.0 million (24.3% margin), driven by adjustments for depreciation and restructuring expenses Reconciliation of Adjusted Gross Profit (in thousands) | Metric | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | :--- | | Gross Profit (GAAP) | $8,449 | $(473) | $37,612 | $29,336 | | Restructuring expenses | $1,263 | $7,466 | $10,664 | $7,466 | | Adjusted Gross Profit (Non-GAAP) | $11,468 | $9,034 | $55,015 | $48,182 | | Adjusted Gross Profit Margin | 24.3% | 14.7% | 24.3% | 14.0% | Reconciliation of Adjusted SG&A Adjusted SG&A for FY2023 was reduced to $54.7 million, primarily due to adjustments for depreciation, stock-based compensation, and restructuring expenses Reconciliation of Adjusted SG&A (in thousands) | Metric | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | :--- | | SG&A (GAAP) | $19,872 | $26,197 | $87,314 | $118,604 | | Depreciation, depletion and amortization | $(6,233) | $(6,551) | $(25,491) | $(35,157) | | Stock-based compensation | $(1,057) | $(1,709) | $(5,114) | $(8,543) | | Adjusted SG&A (Non-GAAP) | $12,018 | $17,416 | $54,749 | $69,375 | | Adjusted SG&A as % of net sales | 25.5% | 28.3% | 24.2% | 20.1% | Reconciliation of Adjusted EBITDA The company achieved positive Adjusted EBITDA of $0.3 million for FY2023, a significant turnaround from a loss in the prior year Reconciliation of Adjusted EBITDA (in thousands) | Metric | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | :--- | | Net loss (GAAP) | $(15,215) | $(35,268) | $(64,813) | $(285,415) | | Depreciation, depletion and amortization | $7,910 | $8,312 | $32,075 | $41,527 | | Restructuring expenses | $1,467 | $7,687 | $11,269 | $7,687 | | Stock-based compensation | $1,057 | $1,709 | $5,114 | $8,543 | | Impairments | $— | $— | $— | $192,328 | | Adjusted EBITDA (Non-GAAP) | $(550) | $(8,382) | $266 | $(21,193) | Reconciliation of Free Cash Flow For FY2023, the company generated positive Free Cash Flow of $2.8 million from operating activities less capital expenditures Reconciliation of Free Cash Flow (in thousands) | Metric | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | :--- | | Net cash from operating activities (GAAP) | $(1,585) | $6,499 | $7,044 | $21,989 | | Capital expenditures (GAAP) | $(159) | $(1,116) | $(4,215) | $(8,229) | | Free Cash Flow (Non-GAAP) | $(1,744) | $5,383 | $2,829 | $13,760 | Definitions of Non-GAAP Measures The company defines non-GAAP measures to provide a clearer view of ongoing operational performance by excluding certain variable or non-recurring items - Adjusted EBITDA: Defined as net loss excluding interest expense, taxes, D&A, stock-based compensation, restructuring charges, and other non-cash or infrequent costs[35] - Adjusted Gross Profit: Defined as gross profit excluding D&A, restructuring charges, and other non-cash or infrequent costs[36] - Adjusted SG&A: Defined as SG&A excluding D&A, stock-based compensation, restructuring charges, and other non-cash or infrequent costs[38] - Free Cash Flow: Defined as Net cash from (used in) operating activities less capital expenditures for property, plant and equipment[41]