Hydrofarm Holdings Group, Inc. (“Hydrofarm” or the “Company”) (Nasdaq: HYFM), a leading independent manufacturer and distributor of branded hydroponics equipment and supplies for controlled environment agriculture, today announced financial results for its second quarter ended June 30, 2023.
Second Quarter 2023 Highlights vs. Prior Year Period:
- Net sales decreased to $63.1 million compared to $97.5 million.
- Gross Profit increased to $14.5 million compared to $7.3 million. Gross Profit Margin increased to 23.0% of net sales compared to 7.5%.
- Adjusted Gross Profit(1) increased to $17.0 million compared to $9.1 million. Adjusted Gross Profit Margin(1) increased to 27.0% of net sales compared to 9.3%.
- Net loss was $12.9 million compared to net loss of $203.3 million.
- Adjusted EBITDA(1) increased to $2.5 million compared to $(6.8) million.
- Cash from operating activities of $9.9 million and Free Cash Flow(1) of $8.3 million.
Updated Full Year 2023 Outlook:
- Net sales of approximately $230 million to $240 million.
- Adjusted EBITDA(1) that is modestly positive.
- Positive Free Cash Flow(1).
(1) Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted SG&A, Adjusted SG&A as a percent of net sales, Adjusted EBITDA, and Free Cash Flow are non-GAAP measures. For reconciliations of GAAP to non-GAAP measures see the “Reconciliation of Non-GAAP Measures” accompanying the release.
Bill Toler, Chairman and Chief Executive Officer of Hydrofarm, said, “In the second quarter, we delivered positive Adjusted EBITDA for the first time since Q1 of 2022, driven by strong gross margin expansion and significant cost reduction measures. Our Adjusted SG&A is now at its lowest quarterly total since Q2 of 2021, before we made all of our 5 acquisitions. Through the sound execution of our restructuring plan and related cost saving efforts, we have achieved significant margin improvement and are now in a much stronger position to navigate the current volume softness in our industry. In addition, our aggressive working capital management continued as we reduced our inventory levels and created meaningfully positive free cash flow of over $8 million in the quarter. We are pleased with our progress and we remain confident in the long-term fundamentals of our business.”
Second Quarter 2023 Financial Results
Net sales in the second quarter of 2023 decreased to $63.1 million compared to $97.5 million in the second quarter of 2022, driven by a 32.5% decline in volume of products sold, a 2.3% decrease in price/mix of products sold, and a 0.5% decline from unfavorable foreign exchange rates. The decrease in volume of products sold was primarily related to oversupply in the cannabis industry. The reduction in price was mainly due to lower prices on specific previously reserved lighting products, as well as a higher mix of generally lower-priced consumables relative to higher-priced durable products.
Gross profit increased to $14.5 million during the second quarter of 2023, compared to $7.3 million in the prior year period. The increase was primarily due to a $9.9 million reduction in inventory provisions compared to the prior year period. Gross profit margin percentage increased to 23.0% from 7.5% in the prior year. Gross profit and gross profit margin percentage also improved due to selling a higher proportion of proprietary brand products and from improved productivity. Adjusted Gross Profit(1) increased to $17.0 million compared to $9.1 million in the prior year period. Adjusted Gross Profit Margin(1)increased to 27.0% of net sales in the second quarter of 2023, compared to 9.3% of net sales in the prior year period. Adjusted Gross Profit and Adjusted Gross Profit Margin increased significantly primarily due to the aforementioned reduction in inventory provisions, selling a higher proportion of proprietary brand products, and improved productivity. This margin improvement was aided by the Company’s restructuring plan and related cost saving initiatives.
Selling, general and administrative (“SG&A”) expense was $23.5 million, compared to $26.0 million in the prior year period. The decrease primarily relates to a decline in compensation costs, professional fees, acquisition and integration expenses, and distribution center exit costs. Partially offsetting these cost reductions, the Company incurred incremental severance expenses in 2023 compared to the prior year due to headcount reductions. Adjusted SG&A(1)decreased to $14.6 million, compared to $15.9 million in the prior year period due primarily to reduced compensation costs and professional fees as a result of the Company’s restructuring plan and related cost saving initiatives.
Net loss was $12.9 million, or $(0.28) per diluted share, compared to a net loss of $203.3 million, or $(4.53) per diluted share, in the prior year period. Net loss in the prior year included non-cash goodwill impairment expense of $189.6 million and a $10.2 million inventory reserve. The improvement in net loss was also due to higher gross profit and lower SG&A expenses, partially offset by a $6.9 million income tax benefit recorded in 2022 and higher interest expense in the current year period.
Adjusted EBITDA(1) was $2.5 million, compared to $(6.8) million in the prior year period. The improvement related to higher gross profit, as described above, and lower SG&A expenses, partially offset by lower sales.
Balance Sheet, Liquidity and Cash Flow
As of June 30, 2023, the Company had $26.7 million in cash and approximately $34 million of available borrowing capacity on its Revolving Credit Facility. The Company finished the second quarter with $123.1 million in principal balance on its Term Loan outstanding, $10.2 million in finance leases, and $0.3 million in other debt outstanding. During 2023, the Company has maintained a zero balance on its Revolving Credit Facility and is in compliance with debt covenants as of June 30, 2023.
The Company generated net cash from operating activities of $9.9 million and invested $1.7 million in capital expenditures, yielding Free Cash Flow(1) of $8.3 million during the three months ended June 30, 2023. As a result of the positive cash flow generated during the second quarter, the Company’s cash level increased by approximately $8.0 million to the $26.7 million noted earlier.
Full Year 2023 Outlook
The Company is updating its full year 2023 outlook:
- Net sales of approximately $230 million to $240 million.
- Adjusted EBITDA(1) that is modestly positive for the full year, consistent with previous expectations.
- Free Cash Flow(1) that is positive for the full year, consistent with previous expectations.
The Company’s 2023 outlook also reaffirms the following assumptions, consistent with previous expectations:
- Improved year-over-year Adjusted Gross Profit(1) and Adjusted Gross Profit margin(1) resulting primarily from (i) cost savings associated with restructuring and related productivity initiatives and (ii) an expectation of minimal additional inventory and accounts receivable reserves or related charges.
- Capital expenditures of approximately $7 million to $9 million.
- Further reduction in inventory and net working capital helping to generate positive Free Cash Flow(1).
(1) Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted SG&A, Adjusted SG&A as a percent of net sales, Adjusted EBITDA, and Free Cash Flow are non-GAAP measures. For reconciliations of GAAP to non-GAAP measures see the “Reconciliation of Non-GAAP Measures” accompanying the release.
Conference Call
The Company will host a conference call to discuss financial results for the second quarter 2023 today at 4:30 p.m. Eastern Time. Bill Toler, Chairman and Chief Executive Officer, and John Lindeman, Chief Financial Officer, will host the call.
The conference call can be accessed live over the phone by dialing 1-877-451-6152. The conference call will also be webcast live and archived on the corporate website at www.hydrofarm.com, under the “News & Events” section.
