HYFM

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hydrofarm Holdings Group Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded today, August 12, 2025. I would now like to turn the call over to John Di Domenico at ICR to begin.

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 second 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's website at www.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.

Thank you, John, and good morning, everyone. During the second quarter, we delivered our 12th consecutive quarter of year-over- year adjusted SG&A savings with a nearly 16% reduction in expenses compared to 2024. These substantial savings helped drive a small sequential improvement in adjusted EBITDA compared to the first quarter of this year despite the tariff environment. Our disciplined approach to working capital management and inventory optimization also allowed us to deliver positive free cash flow for the quarter. We also took a significant step in the quarter with the initiation of a new restructuring plan to enhance our focus on higher-margin brands and to further optimize our distribution and manufacturing network. We expect this initiative over the next several quarters to drive higher-quality revenue streams and improve our level of profitability. Second quarter sales and sales mix came in softer than anticipated as industry headwinds continue to impact our top line performance, in particular, on the durable side of our business. There continues to be oversupply of challenges in the market, consolidation across the retail customer base and minimal real progress made by the government on rescheduling and safer banking. These dynamics have led to inconsistent demand, most notably on the lighting and durables side of our business, which is heavily weighted towards proprietary brands. With that said, there are several positives to call out from our performance within the quarter. To start, we saw solid year-on-year performances on a relative basis from several of our proprietary consumable brands in the nutrients and grow media categories. And while the lighting and durables side of the business overall was very soft in Q2, we did see strong performance from our SunBlaster brand behind early results from our innovative and award-winning Nano and Halo plant lights. As part of this initiative to drive high- quality sales, we also have additional new branded products launching later this year. During the quarter, we also experienced positive performance in some of our newer distributed brands. Our team is excited to work with our distributed brand partners who are committed to aligning closely with us and investing behind their brands to support growth and deliver strong margin and cash flow characteristics. However, we are becoming increasingly selective and in our restructuring program announced today, we took the step to rationalize several distributed brands that do not fit those characteristics. We saw further progress in our noncannabis and non-U.S.-Canadian sales mix during the quarter. Our international sales, in particular, performed well, improving year-on-year with nice results in select European and Asian countries. We remain on pace to improve upon the full year metric we achieved last year and continue to seek ways to diversify our revenue streams. Under our fully integrated ERP system, we have begun to realize improved working capital management, which helped to deliver positive free cash flow. Managing our free cash flow and our overall financial position remains a key area of focus for us, and we remain on pace to deliver positive free cash flow for the last 9 months of 2025. We have made it clear that our top strategic priority is to drive diverse, high-quality revenue streams. After positive momentum in the first quarter of this year, which saw our proprietary brand sales mix improved to 55%, our mix softened in the second quarter due in large part to poor industry demand levels in the durables category. Behind our restructuring initiatives and select planned investments in the second half, we still expect to improve our proprietary mix and adjusted gross profit margin for the full year. Last quarter, we indicated that we would conduct a thorough review of our product portfolio and distribution network to better align with estimated sales demand in the current industry and tariff environment. In Q2, we completed that process and as a result, initiated our new 2025 restructuring plan. This plan further streamlines our product portfolio and our manufacturing and distribution footprint. These actions include a large reduction in the number of SKUs and distributed brands that we will carry going forward. By trimming these underperforming products, we reduced our purchasing and warehousing complexity, reduce our space and personnel requirements, limit our working capital investment and enable our sales team to focus their efforts on higher value brands. We estimate these actions collectively will result in annual cost savings in excess of $3 million plus incremental improvements in working capital. And importantly, we expect approximately 1/3 of the total benefit to start showing through in the second half of 2025. Our strong history of impactful restructuring and cost-saving measures gives us confidence that we will, over time, realize these benefits. In the second half of 2025, we also plan to invest more in marketing behind new innovations, improve our brand websites and further refine our internal CRM capabilities. All of these actions are oriented to drive higher-quality revenue streams. I would like to give an update on the ongoing uncertain tariff environment. As a reminder, our primary tariff exposure is in our durables business as we source certain lighting and equipment products from China. We typically maintain larger inventory positions in products sourced from overseas. And as such, we have not yet realized a dramatic impact from tariffs outside of approximately $300,000 of incremental costs year-to-date. We are managing our business to minimize the impacts from tariffs and are carefully purchasing from vendors abroad in situations where the incremental tariff costs can either be shared with our suppliers or passed on to customers in a limited manner. In addition, we have and will continue to enact pricing actions when necessary and where possible in an effort to preserve our margins. With all of that said, it's important to note that the largest part of our business is our consumables portfolio and this business is mainly sourced from within the U.S. and Canada, albeit there is a portion sourced from other countries. We are increasingly focused on our proprietary consumables business. And with tariffs primarily affecting durables, it is logical for us to maintain that focus. We are executing what is within our control. We believe that by concentrating our efforts on a more optimized product portfolio and manufacturing and distribution footprint, we are positioned much better to drive diverse, high-quality revenue streams, improve profit margins and strengthen our financial position. With that, I'll hand it over to Kevin to further discuss the details of our second quarter financial results and our new 2025 restructuring plan.

Thanks, John, and good morning, everyone. Net sales for the second quarter were $39.2 million, down 28.4% year-over-year, driven primarily by a 27.9% decline in volume mix and a 0.4% decline in pricing. The declines were primarily related to industry oversupply. While we were successful at driving improvements in our higher-margin proprietary brands during the first quarter, continued industry headwinds and lower performance in our durable lighting and equipment products led to a decline in Q2. We are focused on improving our proprietary brand mix in the second half of 2025 and are planning increased investments behind our key brands, along with executing our restructuring plan, as John discussed earlier. Consumable products outperformed durable products on a relative basis. And as a result, our consumables mix ticked up to approximately 80% of sales in the second quarter. Gross profit in the second quarter was $2.8 million or 7.1% of net sales compared to $10.9 million or 19.8% of net sales in the year ago period. Second quarter 2025 gross profit was negatively impacted by $3.3 million of restructuring charges we incurred during the quarter related to noncash inventory write-downs. Adjusted gross profit was $7.5 million or 19.2% of net sales compared to $13.3 million or 24.4% of net sales last year. The decrease was due to lower net sales and a decline in proprietary brand sales mix. As John said, we continue to expect improvement in adjusted gross profit margins for the full year 2025 as we improve our mix and reduce costs. I'll now provide further detail on our new restructuring plan and cost-saving initiatives. In response to the prolonged industry headwinds as well as the evolving tariff situation, during the second quarter, we initiated a restructuring plan to narrow and optimize the size and scope of our product portfolio and related footprint. The restructuring plan entails rationalizing over 1/3 of SKUs and brands in our product portfolio across the U.S. and in Canada, where our portfolio is much larger given the nature of our Garden Center business. The restructuring is intended to simplify our offering and optimize how we manage our inventory as one operating segment. In connection with the product portfolio optimization, we are reducing our footprint, including in our distribution center and manufacturing facilities. We estimate annual cost savings in excess of $3 million and working capital benefits from the restructuring, primarily from a reduction in inventory. We also believe this restructuring will improve efficiency, tighten our focus on our key proprietary brands and help deliver improved profitability. Moving on to our selling, general and administrative expense. In the second quarter, our SG&A expense was $16.1 million compared to $18.7 million last year. Adjusted SG&A expenses were $9.8 million, a 16% reduction when compared to $11.6 million last year. This was our 12th consecutive quarter of meaningful year-over-year adjusted SG&A savings. We are now operating well below our pre-IPO quarterly adjusted SG&A levels from 2020, a testament to the effectiveness of our cost savings initiatives. Adjusted EBITDA was a loss of $2.3 million in the second quarter. The decline from the prior year was due to lower net sales and adjusted gross profit margin, partially offset by adjusted SG&A savings. While the year-over-year comparison was unfavorable, we did improve sequentially compared to the first quarter, while also covering incremental tariff costs. Moving on to the balance sheet and overall liquidity position. Our cash balance as of June 30, 2025, was $11 million. During the quarter, we made a $4.5 million prepayment on our term loan and ended the second quarter with $114.5 million of principal balance on the term loan and approximately $122.6 million of total debt, inclusive of financial lease liabilities. Our net debt at the end of the second quarter was approximately $111.6 million. As a reminder, our term loan facility has no financial maintenance covenant and does not mature until October 2028. We also continue to maintain a 0 balance on our revolving credit facility. As a reminder, in May, 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 $9 million of availability on our revolving line of credit, we had $20 million of total liquidity as of June 30, 2025. In the second quarter, cash from operating activities was $1.7 million and capital expenditures were $0.3 million, yielding free cash flow of $1.4 million. Working capital benefits helped to deliver sequential improvements in free cash flow. We believe that we will deliver positive free cash flow for the last 9 months of 2025. To close, during the second quarter of 2025, we took significant steps to better position our business for improved performance as we move forward. We are committed to executing our strategic priorities and remain optimistic for an eventual demand turnaround in the industry. Thank you for joining us today, and we look forward to providing another update in November on our third quarter call. We are now happy to answer your questions. Operator, please open the line.

[Operator Instructions] We'll take our first question from Dmitry Silversteyn with Water Tower Research.

I want to revisit the tariff impact you mentioned. We've gotten a little bit more of a clarity here as we ended the second quarter with respect of EU and U.K., some of the Asian countries where you're trying to grow China -- tariff deadline has been extended here by another 3 months while negotiations are going on. So can you talk a little bit more about sort of what you expect -- what you're seeing currently in terms of tariffs? And what you expect to see should these negotiations with China not deliver the results that people expect?

Yes, Dmitry, thanks for the question. Yes, I mean, look, tariffs are certainly hard to track with the news coming out daily. But given how the size, scope and speed of tariff changes have been occurring, it's certainly hard to predict the exact impact on our gross margin going forward. I would say thus far in the first half of 2025, I think we've been reasonably successful in covering the incremental cost of tariffs that were incurred on products that mostly for us were sourced out of China during that time period. Going forward in the second half, we'll continue to manage what's within our control with respect to tariffs. We're doing this by sort of very carefully purchasing from vendors abroad in situations where the incremental tariff costs can be shared or passed on to our customers in a limited manner. We're also continuing to review alternative sourcing arrangements from abroad and domestically. And we're also focusing our business on proprietary manufacturer brands, which are at least on the manufacturer side, for us, predominantly consumable products that we make here in the U.S. and Canada. These had the smallest exposure to tariffs and related durable products, which are more heavily impacted by industry conditions right now. So hopefully, that gives you some broad perspective on sort of how we're thinking about going into the second half.

Yes, it does, John. You kind of segued into my next question, and that's your product portfolio optimization and changes. You talked about growing your proprietary business and kind of weeding out the third-party nonproprietary, I guess, which you distribute for other people. What I will ask there is, the reason you are distributing third-party products through your channels, is it just to expand your portfolio offering? Or is it sort of offering a generic lower cost alternative to your proprietary products? In other words, as you continue to weed out third-party distribution or distributing third-party products, what impact will it have on your portfolio overall and your ability to be kind of a one-stop shop for your customers?

Yes. Look, I appreciate the question, for sure. Look, we historically and continue to have had many great long-term relationships with distributed brand partners. Many of these partners have really helped us form a diverse and broad portfolio of products which we offer. And this is not going to change for us. Our team continues to be excited to establish new partnerships where there's an innovative product with growth potential and the brand partner is willing to offer sort of fair margin and cash flow characteristics. But as we've talked about, the industry remains challenging, and it makes sense for us to reduce the offering where there are significant redundancies to sort of underscore that and/or sort of underperforming products. And we took those steps to make changes in our portfolio as we just reported. We did this just to kind of rehash a little bit, so there's clarity on this. We rationalized over 1/3 of the SKUs and brands in our product portfolio across both the U.S. and in Canada. And although the rationalization of the SKUs and brands were across all the product and brand categories, and I want to be clear, it was across all product and brand categories, the largest proportion of underperforming SKUs and brands that we rationalized were found in the durable products and distributed brand areas. And because in general, these are underperforming products that have not been selling well and carrying below average margins, the impact to our net sales is much less than the 1/3 call out. And from a gross profit margin perspective, we actually expect to see our adjusted gross profit margin improve over time. So again, we expect to continue to have a broad offering across all the product categories as we do today. But frankly, during the go- go times of the industry, I think our portfolio probably came a little bit bloated, and we need to continue to trim in spots that it makes sense.

Makes sense, John. Just switching gears here a little bit, talk about the noncannabis part of your business. From what I understand that your loan and garden focus, you're focused on e-commerce and distribution for that channel is aiding you a little bit here to sort of navigate the difficult times in the cannabis industry. Is there any sort of incremental efforts that you're putting behind growing that part of your business? And is there anything that we should look forward to in the balance of 2025 on that front?

Yes, sure. As we sort of talked about in the scripted remarks, our international sales have performed well, certainly on a relative basis. And they actually grew in the quarter on a year-over-year perspective with nice results in select European and Asian countries. We continue to press in that area with our team. And we remain on pace to improve upon sort of the full year diversification metric that we've typically reported, which is this noncannabis and non-U.S. Canadian sales metric. And how are we doing that? We're doing that with the international piece, which I just mentioned. We're doing that with food and floral sales in the U.S. and Canada. We're doing that with Garden Center in the U.S. and Canada. And we're doing that with e-commerce. We've had some success sort of modifying some of our products to better appeal the noncannabis markets. We've done that in the chiller space. We've done that with some of our retainers. We've done that with our some of our rotainers. We've done that our SunBlaster lighting products. And we're continuing to look at some areas in the nutrient category along those lines. So lots of things that we're doing to focus our diversification efforts.

Understood. Understood. And then final question. President Trump was recently speaking publicly talking about the fact that he is considering reclassifying cannabis. What have you heard from D.C.? And what are the chances that, that's actually going to happen as opposed to be talked about again?

Yes. I'd just simply say maybe unlike some others, I'm not sure I have a direct line to Trump. But certainly, you've seen the news. The news yesterday, some of the news we saw even the week before at the Wall Street Journal and Fox business. And it certainly sounds like he's privately or his administration perhaps, I should say, is privately considering rescheduling cannabis. Look, we're certainly encouraged by these reports and hope the Trump administration sees it through in a positive -- with a positive outcome. But we'll wait for judgment until we actually see something. There's been a lot of stops and starts in the past in this area. But certainly, the latest development seems really encouraging. And we do think that this would be a positive for the overall industry as it frees up capital and cash flow for a lot of our end users of our products. So we're certainly excited to see a positive outcome here.

Thank you. And this does conclude our Q&A session as well as the conference call. Thank you all for your participation, and you may disconnect at any time.

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.

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.

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.

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.

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.

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

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?

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.

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.

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.

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?

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.

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?

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.

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?

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.

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.

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

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