Hydrofarm Holdings Group Announces Third Quarter 2022 Results

Company Reiterates Full Year 2022 Outlook

SHOEMAKERSVILLE, Pa., Nov. 09, 2022 (GLOBE NEWSWIRE) — 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 (“CEA”), today announced financial results for its third quarter ended September 30, 2022.

Third Quarter 2022 Highlights vs. Prior Year Period:

• Net sales decreased to $74.2 million compared to $123.8 million.
• Gross Profit decreased to $5.9 million compared to $30.0 million. Adjusted Gross Profit⁽¹⁾⁽²⁾ was $7.8 million compared to $33.0 million.
• Net loss was $(23.5) million, or $(0.52) per diluted share, compared to net income of $17.3 million, or $0.37 per diluted share. Net loss in the third quarter of 2022 included $5.5 million in inventory and accounts receivable reserves and related charges due primarily to challenging industry conditions. Adjusted Net Loss⁽¹⁾⁽²⁾ was $(15.0) million, or $(0.33) per diluted share, compared to Adjusted Net Income⁽¹⁾⁽²⁾ of $31.8 million, or $0.69 per diluted share.
• The $5.5 million of inventory and accounts receivable reserves and related charges recorded during the third quarter were not treated as an adjustment. Adjusted EBITDA⁽¹⁾⁽²⁾ decreased to $(9.0) million compared to $16.1 million in the prior year period.
• Generated net cash from operating activities of $8.2 million and positive Free Cash Flow⁽¹⁾ of $5.6 million.

Reaffirming Full Year 2022 Outlook:

• Net sales of approximately $330 million to $347 million.
• Adjusted EBITDA⁽¹⁾⁽³⁾ of approximately $(25) million to $(16) million, which reflects $19 million of inventory and accounts receivable reserves and related charges recorded during the nine months year-to-date.

_{(1) Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net (Loss) Income, Adjusted EPS, 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.}

_{(2) The $5.5 million of inventory related charges and accounts receivable allowances negatively impacted Net Loss, Adjusted Net (Loss) Income, EPS, Adjusted EPS, and Adjusted EBITDA. Of the $5.5 million, $4.4 million negatively impacted Gross Profit and Adjusted Gross Profit, and $1.1 million negatively impacted SG&A and Adjusted SG&A as it related to higher accounts receivable allowances.}

_{(3) With respect to projected fiscal year 2022 Adjusted EBITDA, a quantitative reconciliation to Net Loss is not available without unreasonable effort due to the variability, complexity and low visibility with respect to certain items, including, but not limited to, impairment, certain potential future acquisition expenses, and the potential tax implications of these estimated expenses, all of which are excluded from Adjusted EBITDA. The Company expects the variability of these items to have a potentially unpredictable, and potentially significant, impact on its future GAAP financial results.}

Bill Toler, Chairman and Chief Executive Officer of Hydrofarm, said, “While our third quarter results were below last year due to the persistent and well acknowledged industry recession, our underlying performance was generally in-line with our internal expectations. Moreover, our strong cash flow from operating activities exceeded our expectations as we generated positive Free Cash Flow⁽¹⁾ for the second quarter in a row. Together, these results demonstrate our ability to navigate the challenging operating environment while the broader industry finds its way through supply/demand imbalances, and as such, we are reaffirming our full year 2022 outlook ranges for net sales and Adjusted EBITDA.”

Toler added, “Despite a COVID overhang and uneven state legislative rollouts, we continue to see overall volume increases through dispensaries according to Headset data and we believe we have reasons to remain confident in the long-term health of our business.”

The combination of our consumable-driven portfolio, as well as a more diverse customer and geographic base of our peat and IGE sales as a result of our 2021 acquisitions, have provided us with a more tempered organic sales decline compared to industry peers.

Bill Toler, Chairman and Chief Executive Officer of Hydrofarm

Moreover, our strong balance sheet, disciplined approach to working capital and cost saving actions through the year should allow us to take advantage of market share opportunities as the industry rebounds and further consolidates.

Third Quarter 2022 Financial Results

Net sales in the third quarter of 2022 decreased to $74.2 million compared to $123.8 million in the third quarter of 2021, driven by a 42.6% decrease in volume of products sold, partially offset by a 2.7% increase in price and mix of products sold, and a 0.2% decline from unfavorable foreign exchange rates. The decrease in product volumes was primarily related to an agricultural oversupply.

Gross profit decreased to $5.9 million, or 7.9% of sales, during the third quarter of 2022 compared to $30.0 million, or 24.2% of sales in the prior year. Adjusted Gross Profit⁽¹⁾⁽²⁾ was $7.8 million or 10.5% of net sales, compared to $33.0 million or 26.6% in the third quarter of 2021. Adjusted gross profit margin⁽¹⁾⁽²⁾ was negatively impacted by the $4.4 million inventory reserves and related charges. We also experienced higher freight and labor costs as a percentage of net sales, partially offset by pricing actions and a higher proportion of proprietary brand sales.

Selling, general and administrative (“SG&A”) expense was $26.2 million in the third quarter of 2022, or 35.3% of net sales, compared to $32.4 million in the third quarter of 2021, or 26.2% of net sales. The decrease in SG&A expense was primarily related to an $8.2 million reduction in acquisition expenses, partially offset by higher depreciation, depletion and amortization expenses of $3.1 million. Adjusted SG&A⁽¹⁾⁽²⁾ decreased to $16.8 million or 22.7% of net sales in the third quarter of 2022, compared to $16.9 million or 13.6% of net sales in the prior year period. The year-over-year change in Adjusted SG&A⁽¹⁾⁽²⁾ primarily relates to a decrease in marketing expenses, partially offset by an increase in insurance expense. Notably, Adjusted SG&A⁽¹⁾⁽²⁾ in the third quarter of 2022 was also negatively impacted by higher than anticipated accounts receivable reserves.

Net loss was $(23.5) million, $(0.52) per diluted share, or (31.7)% of net sales, in the third quarter of 2022, compared to a net income of $17.3 million, or $0.37 per diluted share, or 13.9% of net sales, in the third quarter of 2021. Net loss for the third quarter of 2022 included $5.5 million of inventory and accounts receivable reserves and related charges. Adjusted Net Loss⁽¹⁾⁽²⁾ was $(15.0) million, or $(0.33) per diluted share, in the third quarter of 2022, compared to Adjusted Net Income⁽¹⁾⁽²⁾ of $31.8 million, or $0.69 per diluted share, in the third quarter of 2021.

Adjusted EBITDA⁽¹⁾⁽²⁾ was $(9.0) million, or (12.2)% of net sales, for the third quarter of 2022, compared to $16.1 million, or 13.0% of net sales, in the third quarter of 2021. The decrease in Adjusted EBITDA⁽¹⁾⁽²⁾ was primarily related to lower net sales, lower adjusted gross profit margin, and $5.5 million of inventory and accounts receivable reserves and related charges.

Balance Sheet and Liquidity

As of September 30, 2022, the Company had $16.5 million in cash and an aggregate principal amount of debt outstanding of $126.3 million which consisted of approximately $124.1 million in principal balance on its Term Loan and approximately $2.2 million in finance leases and other debt. The Company maintained a zero balance on its revolving credit facility across the quarter and at quarter end had approximately $62 million of undrawn available borrowing capacity. During the third quarter, the Company paid $15.3 million in contingent consideration payments relating to an earn-out on the 2021 Aurora acquisition, and as a result, the Company has no further contingent payments due for any of its 2021 acquisitions. The Company generated net cash from operating activities of $8.2 million and $15.5 million, respectively, and positive Free Cash Flow⁽¹⁾ of $5.6 million and $8.4 million, respectively, in the three and nine months ended September 30, 2022, largely from cost-saving actions described in prior periods and continued favorable working capital management. The Company was in compliance with all debt covenants as of September 30, 2022.

Full Year 2022 Outlook

The Company is reiterating its full year 2022 outlook:

• Net sales of approximately $330 million to $347 million, which assumes that similar sales levels in recent months continue over the remaining months in the fiscal year, combined with some further reduction due to holiday shortened months in the fourth quarter.
• Adjusted EBITDA⁽¹⁾ of $(25) million to $(16) million, which assumes no further material increase in the $19 million of inventory and accounts receivable reserves and related charges recorded during the nine months year-to-date.

The Company’s 2022 outlook includes the following updated assumptions:

• Capital expenditures of approximately $8 million to $9 million; and
• An estimated tax expense between $0 and $2 million for the full year, excluding the large discrete tax benefit of approximately $12 million recognized in the nine months ended September 30, 2022.

With respect to projected fiscal year 2022 Adjusted EBITDA, a quantitative reconciliation to Net Loss is not available without unreasonable effort due to the variability, complexity and low visibility with respect to certain items, including, but not limited to, impairment, certain potential future acquisition expenses, and the potential tax implications of these estimated expenses, all of which are excluded from Adjusted EBITDA. The Company expects the variability of these items to have a potentially unpredictable, and potentially significant, impact on its future GAAP financial results.

Conference Call

The Company will host a conference call to discuss financial results for the third quarter 2022 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 201-389-0879. A replay will be available after the call until Wednesday, November 16, 2022 and can be accessed by dialing 412-317-6671. The passcode is 13733341. The conference call will also be webcast live and archived on the corporate website at www.hydrofarm.com, under the “Investors” section.

About Hydrofarm

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, as well as a broad portfolio of innovative and proprietary branded products. For over 40 years, Hydrofarm has helped growers make growing easier and more productive. 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.

Original press release

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