Good day, ladies and gentlemen, thank you for standing by. Welcome to the Hydrofarm Holdings Group's took Second Quarter 2022 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, August 9, 2022. I want to turn the call over to Mr. Fitzhugh Taylor, Managing Director at ICR to begin.

Thank you, Anthony. Good afternoon. With me on the call today is Bill Toler, Hydrofarm’s Chairman and Chief Executive Officer; John Lindeman, the Company's Chief Financial Officer. By now everyone should have access to our Second Quarter 2022 Earnings Release, and Form 8-K issued today after market close. These documents are available on the Investor 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 more detailed discussion, the risks that can 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 come for comparable GAAP measures are available in our earnings release. With that, I'd like to turn the call over to Bill Toler. Bill?

Thank you, Fitzhugh, and good afternoon, everyone. As we announced in our press release last week, our second quarter results continued to feel the impact of the Hydrofarm’s Industry Recession in the US, and Canada. Initially, in the quarter, we were encouraged by our results early in Q2, as sales trends displayed signs of stabilizing. However, these trends weakened as a quarter progress, and our mix shifts to less profitable products, impacting our results for Q2 and our expectations for the remainder of the year. More specifically, originally our business plan for 2022. That always expected a seasonal improvement in the spring and summer months, with sales volume continuing to build from there. Once we did not get the expected improvement in Q2, we have now assumed the current trends will continue through the third quarter. And the Q4 will have its normally lower volumes, but off again a lower base that we didn't get the building Q2, so we took the volume out for the entire year. While the industry recession has lasted longer than expected, we remain confident in long term opportunities ahead of us. According to headset data, which is the best measurement of volume sold through dispensaries, units sold continues to grow, albeit at lower prices. Furthermore, with cannabis consumption growing in the US and Canada, ultimately supply and demand will balance and pricing should strengthen. This should invite many growers back to the category and give MSOs, the Multi State Operators the expansion signals they are looking for. When that occurs, we are well positioned for the rebound, the strength of Hydrofarm as a course in our brands and people in our unique customer relationships. And in our manufacturing and distribution footprint. This has not changed. As a reminder, we drove over 50% of our…

Thanks, Bill. And good afternoon, everyone. Net sales for the second quarter were $97.5 million compared to $133.8 million in the prior year period. Our 2021 acquisitions added 13.5% to our top line in the second quarter of 2022 relative to the prior year period. But this M&A benefit was more than offset by a 43.4% decline in organic sales volume. We did realize a 3.1% price mixed benefit in the quarter as we continue to pass through higher costs. While we saw encouraging results in March and April, sales trends in the second half of the quarter tailed off and continued to the remainder of Q2. Furthermore, these sluggish sales trends have continued into the third quarter to date period. We did experience year-over-year growth in select US states. But the growing demand in these states was not yet sizable enough to offset the overall oversupply dynamic in many key US markets. We also experienced a notable sales mix shift in a quarter. On a sequential basis, sales of our proprietary branded products in Q2 were outpaced by sales of distributed and preferred brands relative to Q1. We believe this was caused by the change in relative performance of select product categories, and primarily the relative outperformance of grow media, which is largely composed of distributed preferred brands for us, and the relative underperformance in lighting, which includes several of our proprietary brands. I should note that on a year-over-year basis, we experienced the sales mix benefit is our same as our proprietary brands represented a much higher proportion of our total sales than they did in the prior year period. This positive year-over-year sales mix largely relates to the full quarter benefit we received from all of the acquired proprietary brands in Q2 ‘22 relative to only a…

. Our first question will come from Andrew Carter with Stifel.

First question I want to ask is I appreciate the kind of commentary around the liquidity for the remainder of the year, incremental cost savings. But can you remind us kind of what the parameters are of your term debt and kind of your ability to use the -- kind of the incremental kind of capacity you have left?

Certainly. Thanks, Andrew. Let me start with the ABL facility. So I think, as you know, we have a $100 million credit facility with JPMorgan Chase. And as we noted in the quarter, we had availability of $70 million roughly on that facility, 0 drawn against it at the end of the quarter and $70 million available to us. We really only have one financial covenant of note in that particular facility, and it's a spring fixed-charge coverage ratio that only comes into play when our excess availability on the facility is less than $10 million. And as I noted, 0 drawn at the end of the quarter and $70 million available, so not near that at this time. On the term debt facility, we have $125 million using round number terms. A little bit less than that actually, borrowed currently. And it was a covenant-light structure that has no meaningful financial covenant ratio. We did actually put in the 10-Q additional details on this matter, and so you could see that there.

That's helpful. Yes, that's helpful to get that out of the way. I guess, second question I wanted to ask in terms of the operating environment. You said 3% kind of pricing. And I believe the release stated that you had cost ahead of pricing for the quarter. I guess, one question I would ask is if you stripped out lighting from that where there's deflation, would you be pricing ahead of your cost? Just kind of looking for one -- any indicator out there that there's still some rationality left in this category.

Yes, you're right. Lighting is the one that's kind of going the other way, right? But the other categories, we are taking all the price that has come through to us from either raw material increases or packaging increases on our direct brand or our own brands and anything that's come through our distributor brands. We are passing all of that on. And so far, the elasticities haven't been too exaggerated excited and the competition has been pretty rational. Again, lighting being the exception, which is kind of going the other way on high-pressure sodium and other things. But yes, it's still -- we're taking the pricing that's coming through to us. And it's working out okay.

Our next question will come from Andrea Teixeira with JPMorgan. We will move on to the next question. Our next question will come from David Shakno with William Blair.

This is David Shakno stepping in for Jon Andersen. Two questions for you. The first, I just wanted to clarify from the prepared remarks. Did you say you expect $15 million to $16 million in adjusted SG&A for the next 2 quarters? $15 million, $16 million each?

Correct.

Okay. Great. And then the second thing, what states do you think still require the most consolidation right now? Is it Oklahoma, Michigan or somewhere else? And where do you feel they are in that process?

Yes. I think Oklahoma kind of stands out. I think if there's rough numbers, 15,000 commercial licenses in the U.S., and Oklahoma literally has half of them, which is a bit overbuilt for a 4 million population state. So that one is the one that I think we're seeing the most consolidation and kind of roll-up strategy, if you will. Michigan had some issues although it's not, over the longer term, going to be as severe as what you're seeing in Oklahoma. California, yes, it's still going through some pain. But honestly, I think California will find its normalized sea level here, hopefully, in the next couple of quarters. But we hope to see it sooner than that, but we haven't yet so we're not going to call it. But specifically to your question, Oklahoma is the one that's the most overbuilt, if you will, and needs the most work to get it back to kind of supplying demand on its consumption level.

. Our next question will come from Bill Chappell with Truist Securities.

This is Stephen Lengel on for Bill Chappell. How are the newer markets sort of progressing through the year? And where should we expect the meaningful step-up in growth as we move through -- or move to or through '23?

Stephen, good to hear from you. We've got -- I think 18 out of 50 states showed growth, a lot of those kind of Midwest and East, as you would expect. Some of those smaller ones, places like Montana, obviously, not in the East. But Montana, Louisiana, Mississippi, Florida has actually been a pretty good market. New Jersey has had a lot of dispensary growth and has had some growth at the hydroponic level as well. So you're finally starting to see a little bit of traction in these states that many of them passed in 2020 and -- even some of them, I remember before that. So you're starting to get a little momentum there. Virginia has shown a little bit as well. So the wave is coming East, if you will. It's just simply that the California, Michigan, Oklahoma, Colorado, Oregon triumvirate or 5-state area is just so large relative to these new ones. Any decline there can't be offset by these newer states. But you are seeing that traction. We are seeing that traction, and we think it's going to continue to be fun to watch as we go forward.

This concludes our question-and-answer session. I would like to turn the conference back over to Bill Toler for any closing remarks.

Great. Thank you, operator, and I appreciate your interest in following Hydrofarm today. And we all look forward to speaking with you in greater detail soon. Take care. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.