Hydrofarm Announces Preliminary Q2 2022 Results

Hydrofarm Holdings Group, Inc. (Nasdaq: HYFM) announced preliminary unaudited financial results for its second quarter ended June 30, 2022.

Bill Toler, Chairman and CEO, stated in the company’s press release, “We took positive steps during the second quarter to lower our cost structure and maintained a solid liquidity position; however, the hydroponics industry recession in the US and Canada continued to alter normal seasonal patterns and impacted our results. While we experienced encouraging results in March and April, sales trends weakened in the second half of the second quarter, disrupting our expected sales mix and resulting in net sales, net loss and Adjusted EBITDA below our internal expectations for the full quarter.“Toler continued, “Through our team’s net working capital management, we increased our cash position, lowered our net debt and maintained a solid liquidity position during the second quarter. Our team has also enacted additional expense-cutting measures, to further reduce our costs. When coupled with our prior cost savings actions, we estimate that we have reduced our costs by approximately $14.0 million on an annualized basis.”

Preliminary Second Quarter 2022 Financial Results

Preliminary unaudited financial results for our second quarter ended June 30, 2022 include the following:

• Net sales estimated between $96.0 million to $97.5 million, as compared to $133.8 million for the three months ended June 30, 2021, a decrease of approximately 28% calculated using the midpoint of the range.
• Declining valuation trends within the industry and in the broader market adversely impacted the Company’s market valuation since its last quarterly report and triggered a full evaluation of the goodwill arising from prior acquisitions. As a result, the Company’s preliminary results for the second quarter include an estimated impairment of goodwill of approximately $189.6 million.
• Net loss expected to range between ($210.4) million and ($200.4) million, as compared to net income of $2.3 million for the three months ended June 30, 2021. The net loss range includes estimated non-cash expenses of $189.6 million in goodwill impairment and $10.2 million in inventory reserve recorded at the end of the second quarter.
• Adjusted EBITDA⁽¹⁾, which was impacted by the $10.2 million inventory reserve, estimated to be between ($8.4) million to ($6.9) million, as compared to $16.2 million for the three months ended June 30, 2021.
• As of June 30, 2022, the Company had $27.4 million in cash, cash equivalents and restricted cash, an aggregate principal amount of debt outstanding of $126.7 million (including $0 drawn on the Company’s revolving credit facility, approximately $124.4 million in principal balance on its Term Loan and approximately $2.4 million in finance leases and other debt), $15.3 million in contingent payments (composed of an earn-out on the 2021 Aurora acquisition which was subsequently paid out in July 2022) and approximately $71 million of available borrowing capacity under its revolving credit agreement.   The Company decreased its net debt by approximately $14.1 million during the second quarter by improving its working capital position and controlling costs. The Company was in compliance with all debt covenants as of June 30, 2022.

On a year-over-year basis, the expected decrease in Adjusted EBITDA⁽¹⁾ is due primarily to (i) lower net sales, and (ii) lower gross profit margin which was negatively impacted by an inventory reserve consisting primarily of a write-down of certain lighting products (for which we did not adjust EBITDA) of approximately $10.2 million, as well as higher labor and freight costs.

On a sequential basis, relative to the previously reported fiscal first quarter, the expected decrease in Adjusted EBITDA⁽¹⁾ is due primarily to (i) lower net sales, and (ii) lower gross profit margin which was negatively impacted by our sales mix, as we realized a higher proportion of lower margin distributed and preferred branded products relative to our proprietary branded products, and the aforementioned inventory reserve, which was over $7 million higher than in the previous quarter. Those decreases were partially offset by lower selling, general and administrative expenses as the Company’s recent cost cutting actions lowered expenses.

Preliminary results remain subject to the completion of normal quarter-end accounting procedures and adjustments and are subject to change. In particular, certain items impacting net loss, particularly those arising from the estimated impairment of goodwill and income taxes (which would not impact net sales or Adjusted EBITDA⁽¹⁾) and inventory reserve (which would not impact net sales but would impact Adjusted EBITDA), remain open and therefore these amounts could vary materially from current estimates.

Updated Full Year 2022 Guidance

Mr. Toler concluded, “Sales trends in July suggest that the overall industry continues to face headwinds and that typical seasonal patterns may not apply for the duration of this year. For these reasons, we are revising downward our estimates for the remainder of the year. While we expect the industry to return to growth in the future, as highly populated states in the Eastern U.S. actively implement adult-use cannabis legislation and more mature states in the Western U.S. normalize, predicting the exact timing of a return to historical growth remains a challenge for the industry.   As a result, we will continue to focus on further cost-saving opportunities and liquidity actions to ensure that our leadership position in the hydroponics industry strengthens during this industry downturn.”

In light of the Company’s recent performance and developments in the industry, the Company is providing the following updated outlook for the full fiscal year 2022:

• Net sales of approximately $330.0 million to $347.0 million, which assumes similar sales levels to those experienced from late second quarter through July 2022 continue over the remaining months in the fiscal year, combined with some further reduction to account for holiday shortened months in the fourth quarter.
• Adjusted EBITDA⁽¹⁾, which is impacted by $13.4 million of inventory reserves in the year-to-date period, of negative ($25) million to ($16) million, which assumes no material increase in the amount of inventory or accounts receivable reserves.

With respect to projected fiscal year 2022 Adjusted EBITDA⁽¹⁾, a quantitative reconciliation 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 income tax implications of these estimated expenses, all of which are excluded from Adjusted EBITDA⁽¹⁾. We expect the variability of these items to have a potentially unpredictable, and potentially significant, impact on our future GAAP financial results.