• Net Sales: $54.8 million, down 13.1% year over year.
• Adjusted Gross Profit: $13.3 million or 24.4% of net sales.
• Adjusted EBITDA: $1.7 million in the second quarter.
• SG&A Expenses: $18.7 million, with adjusted SG&A expenses at $11.6 million.
• Cash Balance: $30.3 million as of June 30, 2024.
• Total Debt: Approximately $129 million.
• Free Cash Flow: $3.4 million for the second quarter.
• Proprietary Brands Sales Mix: Increased to approximately 58% of net sales.

• Warning! GuruFocus has detected 2 Warning Signs with HYFM.

Release Date: August 08, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Hydrofarm Holdings Group Inc (NASDAQ:HYFM) achieved positive adjusted EBITDA for the fourth time in the last five quarters, indicating successful cost-saving initiatives.
• The company reported sequential improvement in adjusted gross profit margin over the first quarter levels.
• Proprietary brands such as Active Aqua, PHOTOBIO, and Roots Organic showed year-on-year growth, driven by innovation in lighting products.
• Hydrofarm Holdings Group Inc (NASDAQ:HYFM) maintained a streak of seven consecutive months of sequential net sales growth, the longest since going public.
• The company is diversifying revenue sources by expanding international presence and increasing non-cannabis sales, which is expected to grow the sales mix for the full year 2024.

Negative Points

• Net sales for the second quarter were down 13.1% year over year, primarily due to a decrease in volume mix and pricing.
• The company experienced a decline in adjusted gross profit margin compared to the previous year, attributed to a difficult comparison period.
• Hydrofarm Holdings Group Inc (NASDAQ:HYFM) faced challenges due to oversupply in the cannabis industry, impacting volume mix.
• The initial inventory investments in new distribution relationships had a slightly negative impact on free cash flow for the quarter.
• The company is still heavily influenced by mature markets like California, which are under pressure, affecting overall growth potential.

Q & A Highlights

Q: Can you discuss the demand trends in the quarter and whether the industry held steady or deteriorated during Q2? A: William Toler, CEO: May marked the seventh consecutive month of sequential growth, but this trend did not continue into June. We saw encouraging signs with durable products like Active Aqua and PHOTOBIO showing year-over-year growth, indicating replenishment or new builds. Overall, demand signs are stable with a positive mix change towards durables.

Q: How is the geographical mix affecting your sales, especially with new states like New York and Ohio opening up? A: William Toler, CEO: New states are achieving some critical mass but aren't yet enough to offset declines in mature markets like California and Michigan. However, states like Minnesota, Missouri, and New York are showing promise, and the potential for growth in Florida could significantly impact future opportunities.

Q: Can you elaborate on the top-line progression and what factors could influence whether you hit the higher or lower end of your guidance range? A: William Toler, CEO: We are currently trending at the better end of our range, but due to industry uncertainties, we are cautious about tightening our guidance. We hope to maintain this trend but need further stabilization before making any adjustments.

Q: What are your expectations for gross margin and adjusted EBITDA in the second half of the year? A: John Lindeman, CFO: We typically see stronger profitability in Q3 than Q4 due to seasonality. We expect stronger margins in the second half, with Q3 likely being more profitable than Q4.

Q: How has the production ramp in Ohio affected your business, and what is the outlook for consumables versus durables? A: William Toler, CEO: Ohio has been a strong state for us, benefiting from new opportunities. While consumables make up a significant portion of our business, new states initially boost durables, which is reflected in our improved durable product sales.

Q: Can you provide insights into the non-cannabis sectors like food, floral, and lawn and garden? A: William Toler, CEO: Our lawn and garden business in Canada is stable, and we are developing relationships in the U.S. This sector grows slowly but steadily, and we expect it to contribute more in 2024 and 2025.

Q: What progress have you made on cost-cutting, and is there more room for SG&A reductions? A: John Lindeman, CFO: We've improved our adjusted gross profit margin by 540 basis points year-over-year and reduced adjusted SG&A expenses by $17.1 million. We expect further margin expansion as we continue to drive proprietary brands and consumable products.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.