Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hydrofarm Holdings Group First Quarter 2025 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode, and the lines will be open for your questions following the presentation. Please note that this conference is being recorded today, May 13, 2025. I would now like to turn the call over to Anna Kate Heller at ICR to begin.

Anna Kate Heller: Thank you, and good morning. With me on the call today is John Lindeman, Hydrofarm’s Chief Executive Officer; and Kevin O’Brien, the Company’s Chief Financial Officer. By now, everyone should have access to our first quarter 2025 earnings release and Form 8-K issued this morning as well as an investor presentation available for reference. These documents are available on the Investors section of Hydrofarm website at hydrofarm.com. Before we begin our formal remarks, please note that our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from our current expectations.

We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. Lastly, during today’s call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP, and reconciliations to comparable GAAP measures are available in our earnings release. With that, I would like to turn the call over to John Lindeman.

John Lindeman: Thank you, Anna Kate, and good morning, everyone. In the first quarter of 2025, we delivered promising sequential improvements across the business. Coming into the era, our first priority was to reemphasize the focus on our higher margin proprietary brands across the Hydrofarm platform to drive high-quality revenue streams and improve profitability. We took a number of actions to help build momentum in these offerings. And as a result, compared to the challenging fourth quarter, our first quarter proprietary brand sales mix improved meaningfully to 55% from 52% helping to drive a substantial sequential improvement in our adjusted gross profit margin. This also led to sequential growth in adjusted EBITDA in each month within the quarter.

Our strategic initiatives to drive sales in our proprietary brands has been effective in the past and allows to operate profitably at compressed industry sales levels for many quarters over the past couple of years. While we have plenty more work to do to sustain and improve this statistic, we are encouraged by our first quarter results. I’d also like to call out a few additional bright spots from the quarter. First, we saw a relatively strong year-on-year and sequential performance from several of our proprietary consumable brands in the nutrients and grow media categories. On the durable side, while the overall category had a difficult quarter, we saw a year-on-year and sequential growth in one of our proprietary lighting brands. Collectively, the improvement in these areas helped lift our proprietary brand mix against the fourth quarter of 2024.

On the distributed side, we continue to benefit from incremental sales of the brands onboarded in the spring of 2024. With that said, distributed brands overall continued to weigh on our profit margins. And consistent with our strategic priorities, our focus will remain centered on our proprietary brands. In Q1, we also delivered our 11th consecutive quarter of meaningful adjusted SG&A expense savings. The roughly 11% expense savings versus last year were largely in people costs and facility expenses in conjunction with the integration and consolidation of our front and backed offices conducted over the past 12 months. We were also off to a decent start in our non-cannabis and non-U.S. Canadian sales mix, which accounted for more than a quarter of our total sales in Q1.

We remain on pace this year to further improve upon the full year metric that we achieved last year. One of our product sets that tends to skew towards non-cannabis applications is our peat moss business. And as a reminder, we harvest our peat moss in Canada, but the majority of the product is imported and sold into the United States. During the first quarter, the U.S. government flipped flopped on the products that qualify under Canadian import tariffs. Eventually, the government clarified a march that Canadian peat would be tariff-free as it had been for years prior as a qualified product under the USMCA agreement. During this period, we noticed our U.S. customers pausing until there was clarity on the situation, which led to unpredictable ordering patterns within the quarter.

With that behind us, we expect our peat business will pick up and further contribute to our diversification strategy. While our overall results were strong compared to the fourth quarter, we were hampered by prolonged industry oversupply challenges, lack of government progress on items such as rescheduling and safer banking and continued consolidation across the retail customer base. While these conditions weighed on our year-over-year results, we were certainly not alone. In fact, we noticed among the public reporters in our space that for the first time since our IPO, Hydrofarm was the largest generator of hydroponic equipment and supplies revenue in the quarter. We would much prefer to see everyone across our industry prosper, but thought it was an interesting point, nonetheless.

Also of note is the current uncertainty surrounding tariffs. You’ve already heard me talk about the Q1 tariff situation with Aurora Peat, which we believe is behind us. As it relates to direct tariff exposure across our business, we source certain lighting and equipment products within our durables category from China, which account for an estimated low- to mid-teens percentage of our net sales. Generally speaking, we maintain larger inventory positions in products sourced from overseas as the lead times are much longer than domestically sourced products. That said, we are actively engaged in renegotiations with existing vendors while also evaluating alternative cost-effective sourcing options. Our consumables business is much more insulated from the ongoing trade disputes.

And as you know, consumables are both the largest and strongest part of our business. The tariff situation is rapidly evolving and remains very complex as we witnessed from yesterday’s announcement effectively pausing the very high China tariffs for 90 days. As a result, it has become challenging to make any accurate forecast on the impact of tariffs on our future performance, particularly within our durable products category. Although our Q1 performance was in line with our prior full year guidance on all metrics except free cash flow, with the continued tariff uncertainty on top of the prolonged industry challenges, we believe it is best to withdraw our full year 2025 guidance for net sales, adjusted EBITDA and free cash flow at this time.

We intend to provide an update once we have a clear view on the impact of tariffs and the details behind our own reciprocal action plans. To support additional margin expansion while operating under the new tariff regime, we are conducting a thorough review of our product portfolio and distribution network to better align with estimated sales demand. We believe that streamlining our product set could further improve our gross profit margins and help us capture additional adjusted SG&A expense savings. As a reminder, we have a demonstrated track record of effective restructuring and cost saving actions that have reduced our manufacturing and distribution space by approximately 50%, improved full year adjusted gross profit margins by several hundred basis points and driven consistent adjusted SG&A expense savings since 2022.

We have done this while simultaneously investing in productivity-enhancing capital equipment, which has strengthened our operational capabilities and helped us maintain exceptional customer service. While we cannot control the timing of future government action on either the tariff or industry front, we can and will continue to control our product portfolio, our manufacturing and distribution footprint and our team’s focus and capabilities. We will continue building on these positives we delivered in the first quarter and are committed to executing on these strategic priorities moving forward. I would like to reiterate one last point before handing it over to Kevin. We are in the process of actively pursuing strategic alternatives that are designed to enhance shareholder value, whether in the form of a potential acquisition, divestiture or a strategic combination.

While we have nothing yet to report on this front, we will keep you in tune as and when appropriate. With that, I’ll hand it over to Kevin to further discuss the details of our first quarter financial results.

Kevin O: Thanks, John, and good morning, everyone. Net sales for the first quarter were $40.5 million, down 25.2% year-over-year, driven primarily by a 22.6% decrease in volume mix and a 1.8% decline in pricing. This decrease in volume mix was mainly related to an oversupply in the cannabis industry. The pricing decline was driven by promotional activity in the period. Proprietary brands accounted for 55% of our net sales, down compared to the prior year first quarter. However, as John highlighted, this metric improved meaningfully when compared to the fourth quarter of 2024. The corrective actions we began to implement at the end of 2024 were effective in the first quarter, and we will continue to invest behind our higher-margin key proprietary brands to further this momentum.

During the first quarter, consumable products accounted for over three quarters of our total sales, representing a small increase over 2024. Gross profit in the first quarter was $6.9 million or 17% of net sales compared to $10.9 million or 20.2% of net sales in the year ago period. Adjusted gross profit was $8.5 million or 21% of net sales compared to $12.7 million or 23.4% of net sales last year. The decrease was due to lower net sales and a reduction in proprietary brand mix in the quarter. However, our adjusted gross profit margin more than doubled when compared to the fourth quarter of 2024 as we improved proprietary brand sales sequentially. Specifically, we sold more of our key nutrient and grow media brands that we manufacture in the U.S. I’ll now provide an update on our restructuring and cost-saving actions.

By the end of 2024, we had substantially completed the second phase of our restructuring plan. That plan consisted of significant reductions to our manufacturing and distribution footprint, particularly with respect to durable equipment products. While the prior year restructuring plan has been completed, in light of the continued challenging industry conditions and the complex international tariff situation, we are evaluating our product portfolio and several related actions to further right-size the business. We believe there is opportunity to improve efficiency and profitability and focus our resources on Hydrofarm’s core proprietary brand strategy and innovations that drive growth and volume in our U.S. and Canadian manufacturing locations.

Moving on to our selling, general and administrative expense. In the first quarter, our SG&A expense was $17.9 million compared to $19.6 million last year. Adjusted SG&A expenses were $11 million, an 11% reduction when compared to $12.3 million last year. This is our 11th consecutive quarter of significant year-over-year adjusted SG&A savings. We have made substantial progress and believe there is opportunity for further cost savings. We are actively reviewing opportunities to reduce facility space and overall inventory levels in connection with our product portfolio review and distribution center consolidations. Adjusted EBITDA was a loss of $2.4 million in the first quarter. The loss was due to lower net sales and lower adjusted gross profit margin, partially offset by adjusted SG&A savings.

While the year-over-year comparison was unfavorable, adjusted EBITDA improved by $4.8 million compared to the fourth quarter of 2024. A portion of that is seasonality in our business, but the sequential performance also speaks to the initial impacts of the improvement in our proprietary brand performance. Moving on to the balance sheet and overall liquidity position. Our cash balance as of March 31, 2025, was $13.7 million. We ended the first quarter with $119 million of term debt and approximately $127.3 million of total debt, inclusive of financial lease liabilities. Our net debt at the end of the first quarter was approximately $113.6 million. As a reminder, our term loan facility has no financial maintenance covenant, and it does not mature until October 2028.

We also continue to maintain a zero balance on our revolving credit facility. As an update, on May 9, 2025, we entered into a seventh amendment to our revolving credit facility, which extended the maturity date to June 30, 2027, and reduced the maximum commitment amount to $22 million. With cash on hand and approximately $17 million of availability on our revolving line of credit, we had $31 million of total liquidity as of March 31, 2025. In the first quarter, cash used in operating activities was negative $11.8 million and capital expenditures were $0.2 million, yielding negative free cash flow of $12 million. As a reminder, the first quarter is seasonally a negative period for our free cash flow. We are focused on improving our financial position and with the business fully integrated, we are in a better position to manage working capital.

We believe we can generate breakeven or better free cash flow for the remainder of 2025. To close, we are proud of the progress we made in the first quarter. Our strategic actions to reinvigorate our higher-margin key proprietary brand sales were effective in the first quarter, and we will continue to invest behind them to deliver positive momentum throughout the year. We remain optimistic for an eventual demand turnaround in the industry and are confident in our positioning for when that comes. We also look forward to providing an update on our product portfolio review on or before our second quarter call in August. Thank you all for joining us, and we are now happy to answer your questions. Operator, please open the line.

Brien: Thanks, John, and good morning, everyone. Net sales for the first quarter were $40.5 million, down 25.2% year-over-year, driven primarily by a 22.6% decrease in volume mix and a 1.8% decline in pricing. This decrease in volume mix was mainly related to an oversupply in the cannabis industry. The pricing decline was driven by promotional activity in the period. Proprietary brands accounted for 55% of our net sales, down compared to the prior year first quarter. However, as John highlighted, this metric improved meaningfully when compared to the fourth quarter of 2024. The corrective actions we began to implement at the end of 2024 were effective in the first quarter, and we will continue to invest behind our higher-margin key proprietary brands to further this momentum.

Operator: [Operator Instructions] And we’ll take our first question from Dmitry Silversteyn with Water Tower Research. Please go ahead. Your line is open.

Dmitry Silversteyn: John, I just wanted to follow up on some comments you made throughout your presentation on proprietary brand sales and consumables and durable products in the first quarter. You had a nice recovery in your proprietary brands as a percent of revenues to 55% from — I think it was 52% last quarter, but you’re still below what you delivered in the first three quarters of last year, which I think it was closer to 56% to 58%. So, what are — what’s your outlook for this business for the remainder of the year and your ability to grow it and grow it as a percentage of revenue? And can you provide any additional color on which particular brands are most instrumental in driving that growth?

John Lindeman: Thanks for the question. Yes, let me tack that. I mean to start off with let’s talk about the nutrient side of our business. Our largest proprietary nutrient brands, which tend to be Grotek and House & Garden, performed better than our own internal expectations for the first quarter. In addition to that, in the grow media category, we experienced strong performance for our U.S. manufactured brands, which really surround the Roots Organics product. For largely the same reasons that I’ll talk about here in a second on the nutrient side, which is we have continued to refine our incentive programs coming into 2025 from what they were in 2024. We continue to invest behind our sales team’s capabilities in a lot of ways in terms of software and research tools and really just trying to make sure we emphasize and reiterate with them the importance of our house brands and make sure that when they’re out there doing so, selling against that initiative, they understand it’s going to hit their pocket book as well.

And on top of that, we continue to enhance our marketing efforts. So, all of those reasons are the things that we expect will continue to be able to drive improvement in that percentage over time.

Dmitry Silversteyn: Okay. John, that was helpful. You mentioned tariffs and the potential impact. Can you provide a little bit more color on exactly where you’re expecting primary tariff pressures? In other words, your actual product costs going out or your selling profit going down because of the tariffs? And also, if there’s any secondary effects of tariffs as far as just slowing down demand as people are uncertain about what price they’re going to end up paying for some of these products.

John Lindeman: Yes. Let me give you a little bit of background first, and I’ll tack the exact question. I mean, look, if you look at our product portfolio, we kind of segmented into consumables and durables at a very, very high level. As you know, three quarters, almost 80% of our business now is in the consumable side versus the durable side. And on the consumable side, we really manufacture at least for our proprietary brands, most of that product in the United States. There is a little bit up in Canada, which I referenced in our prepared remarks. That product now is clear to come into the United States tariff-free. But I think on the consumable side, we feel fairly good. The durable side is where it’s a little bit more challenging.

We do source some products out of China on the durable side of our business, namely in the lighting and equipment categories. And I think as we may have mentioned in our call, we do have a fair amount of inventory in this area. We’ve got $50 million of inventory in total sort of ending in the first quarter. And certainly, we’ve got longer lead times in terms of just months on hand in our durable product. So, we’ve got time to sort of make some tweaks and changes. We referenced we’re renegotiating with some vendors where we’re receiving input cost increases from vendors on the tariff side, we are carefully when needed, pushing those through. And overall, we’re continuing to make some progress there. The pause for 90 days on China certainly seems to help, but we’ll have to see.

It seems to be day by day in tariff land right now. Hopefully, that helps you a little bit.

Dmitry Silversteyn: It does. I guess the follow-up question would be, given what’s going on with the administration, with the new administration in the White House these days, and they seem to be a little bit more open to unconventional medicine or functional medicine, however you want to put it. But can you talk about sort of the environment in Washington and what you’re doing there to try to get the cannabis market not deregulated, but at least reclassified? And is there any optimism for the balance of this year or at least for this administration to see things change when it comes to your primary market?

John Lindeman: Yes, there is. I mean, look, all of us across the industry continue to push on the regulatory front in our own ways. Rescheduling, which has been talked about for some time, seems to have picked up a few small but maybe important notes of momentum. First, there was very recently a new poll that came out that was conducted by a research firm that’s affiliated with several notable Republicans, suggesting over 70% of Americans are now in favor of rescheduling cannabis, and that includes now a majority of Republican voters, which is an interesting point. And then on top of that, President Trump’s new nominee for the DEA administration just noted in confirmation hearings that the stalled rescheduling process under the prior administrator would now be one of his top priorities upon confirmation into the role.

So hopefully, that sets the table for some positive momentum on rescheduling. On top of that, President Trump has — there’s been some reports at least that Trump has been lobbying members of Congress to push forward on safer banking, which also had previously stalled in the Senate. So, as we’ve mentioned before on previous calls and others in the industry have talked about, rescheduling and safer banking would certainly reduce taxes and open up banking access to growers across the space. So, for sure, a positive. And we’ll look to see as these things build over time, but certainly seems to be stepping in the right direction.

Dmitry Silversteyn: That’s very helpful and encouraging. You mentioned some positives that you saw in the quarter, sort of the green shoots that may be starting to emerge in the industry and your business specifically. Can you revisit that and maybe provide a little bit more granularity on what you mean by that?

John Lindeman: Yes. Well, look, on top of sort of the industry comments I just made about sort of re-struggling – re-scheduling and safer, in terms of our own business specifically, proprietary consumable performance, which is certainly key to our strategy has been and will continue to be, certainly was positive. We remain on pace for new proprietary product launches set for the United States in the second half of the year and we continue to push on the international front, having launched existing products into portions of Europe and Southeast Asia with new on-the-ground distribution partners in those regions. So, those are maybe just a couple of areas where we’re certainly really pushing.

Dmitry Silversteyn: Understood. So, putting that all together, and I know you took off the official guidance for 2025. But how do you see 2025 shaping up, given what you know now and obviously, tariffs are still sort of up in the air. But from the things that you can control and from the industry dynamics that you observe right now, what do you — how do you see 2025 unfolding?

John Lindeman: Yes. Let me start by maybe just giving a little bit more background and reiterating that our Q1 performance was generally in line with our previous outlook, except for the free cash flow dynamic. And so, in some ways, our view on the business has not really changed all that much. However, since our last earnings call, obviously, the China tariff increased dramatically to 145%, only to be paused for 90 days in yesterday’s announcement. So, while we’ve got a lot of inventory on hand, as I mentioned, and have longer inventory positions in several of our China-based products, there still continues to be uncertainty surrounding customer order patterns. Will customers accelerate purchases now only to defer if and when the originally planned higher China tariffs go into effect?

And what would accelerate orders mean against our inventory stockpile and our own purchasing needs. So, when we weigh this tariff uncertainty against the prolonged industry recession that’s been occurring and our own intentions to really now refine our own product portfolio, we just felt like the prudent thing was to pause guidance for now. With respect to the outlook assumptions, we are maintaining an expectation to improve our adjusted gross profit margin and to lower our adjusted SG&A expense for the full year. And this largely relates to the initiatives that we have in place, some of which I explained earlier, that are planned in 2025 and in many cases, already enacted. And we really think these things have an opportunity to continue to influence these full year KPIs. So, I think overall, it’s — we felt like it’s prudent to pause.

But in some respects, outlook hasn’t changed wildly from when we began the year.

Operator: And there are no further questions on the line at this time. I’ll turn the program back to John Lindeman for any additional or closing remarks.

John Lindeman: Yes. Thank you all for joining our call this morning and look forward to communication next quarter.

Operator: This does conclude today’s program. Thank you for your participation, and you may now disconnect.

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Q1 2025

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