Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hydrofarm Holdings Group third 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 questions following the presentation. Please note that this conference is being recorded today, November ninth, 2022. I would now like to turn the call over to Mr. Fitzhugh Taylor, Managing Director at ICR to begin. Please go ahead. Thank you, Victoria, and good afternoon. With me on the call today is Bill Toler, Hydrofarm's Chairman and Chief Executive Officer, and John Lindeman, the company's Chief Financial Officer. By now, everyone should have access to our third quarter 2022 earnings release and Form 8-K issued 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 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'd like to turn the call over to Bill Toler. Bill? Thank you, Fitzhugh, and good afternoon, everyone. As you saw in today's press release, our Q3 results continue to reflect an industry under pressure from the oversupply dynamics and lack of consistent legislative support. Net sales for the quarter were in line with our own internal expectations, and though our reported adjusted EBITDA was heavily impacted by inventory and accounts receivable reserves and related charges, our underlying profit performance was generally in line with our internal estimates. Additionally, our free cash flow performance exceeded our expectations as we generated positive free cash flow for the second straight quarter. As the industry evolves, we are adapting and moving with it, and this was demonstrated during our third quarter. Even though our product sales through our specialty retail channel remain challenged in the current industry environment, particularly in the mature states, our commercial sales have been a bright spot. Our commercial effort has been led by our associates at the Innovative Growers Equipment, or IGE company, or part of our company, which we acquired in November of 2021. Currently, our commercial sales make up 35% of our year-to-date 2022 sales through the end of the third quarter, an increase from only 19% of company sales in the same year-to-date period last year. Now I'll take a moment to talk about the impact of legislation. The improvement in our commercial sales percentage is due in part to the benefit of IGE, as I noted, but it's also a result of winning bids with growers around the country, particularly in states that have more recently adopted and implemented favorable cannabis legislation. For example, nearly half the sales of our IGE-branded products were sold in states largely along the eastern seaboard. Though difficult to predict in the short term, over the long term, we expect continued growth from commercial operations in new states as legislation becomes more favorable to cannabis on a state-by-state basis. We continue to be pleased with our Peat business, which serves a diverse customer base that includes both food and floral grow operations and is less reliant on North American cannabis trends. We believe the relative success in our Peat business points to the benefits of our consumable portfolio and our ability to more broadly to adapt during a period of supply imbalance in the cannabis sector. As we look ahead, we remain confident in the long-term opportunities of our business. In addition to some of the recent positives I just discussed, we believe we have several reasons to be confident about our long-term opportunity. First, we believe the industry's supply-demand imbalance brought on by the COVID overhang and uneven state legislative rollouts has been inching the industry closer to a rebound. Additionally, recent legislative activity at both the state and national level, including yesterday's adult use passage in Missouri and Maryland, continue to point towards greater consumer access and awareness of legal cannabis, and ultimately, even higher legal cannabis consumption in the years ahead. Next, our consumable-driven portfolio has provided us with a more tempered decline compared to some of our industry peers. We believe this fact, coupled with our strong financial position, sets us up well to grow market share and to engage in consolidation opportunities in the future. Finally, as we discussed previously, we've taken a number of actions this year to better position our organization for future growth. We have right-sized where necessary with an overall impact of reducing our headcount by over 25%. We continue to remain focused on mitigating costs, streamlining our manufacturing and distribution operations, and further diversifying our revenue streams. In closing, we believe our actions thus far in 2022, and those yet to come, put us in a healthy position heading into 2023 and beyond. Furthermore, we remain confident the industry will return to growth, and we'll be better positioned than ever to take advantage of these opportunities ahead, as we have shaped our business into a leaner and stronger organization. With that, I'll turn it over to John to discuss the details of our third quarter financial results and our outlook for 2022. John? Thank you, Bill, and good afternoon, everyone. Net sales for the third quarter were $74.2 million, compared to $123.8 million in the prior year period. Our 2021 acquisitions added 9.5% to our top line in the third quarter of 2022 relative to the prior year period. This M&A benefit was more than offset by a 52.1% decline in organic sales volume. We realized a 2.7% price mix benefit in the quarter as we continue to pass through higher costs, but the magnitude of our pricing benefit has been tempered in the second half by the need to reduce price in the lighting category, which is the category that's been hardest hit by the industry downturn. Commercial sales as a percentage of our total have strengthened in spite of the industry weakness in the lighting category. Our proportional increase in commercial sales is due in part to our acquisitions, namely IGE, which continues to drive relatively strong demand in this otherwise challenged industry environment. Bill earlier noted the magnitude of IGE's business along the eastern seaboard, and I would note strength in several states, particularly Massachusetts, Mississippi, Florida, Louisiana, Pennsylvania, and New Jersey, all of which are among our top 10 commercial states. As we noted last quarter, the industry recession is having an impact on our sales mix. This is primarily due to the relatively strong performance of distributed brands on a sequential basis relative to our proprietary and preferred brands. While our proprietary brands continue to drive over 50% of our total sales in Q3, the current industry environment is resulting in weak volumes in our lighting product sales, which in our portfolio are dominantly proprietary branded. While conversely, we're experiencing stronger demand for grow media products, which are primarily composed of distributed and preferred brands. We expect this trend to continue into our fiscal fourth quarter. Gross profit in the third quarter decreased to $5.9 million compared to $30 million in the year ago period. Excluding certain items largely related to our acquisitions, adjusted gross profit was $7.8 million or 10.5% of net sales in the third quarter compared to $33 million or 26.6% of net sales last year. The decrease in adjusted gross profit margin is largely due to the negative impact of the $4.4 million increase in inventory reserves and related charges that we recorded at the end of Q3. Excluding these inventory charges, adjusted gross profit margin would have been much higher than disclosed, albeit still lower than last year. This margin difference was due to the lower total sales volume, the altered sales mix, as well as proportionally higher freight and labor costs. Selling general administrative expense decreased to $26.2 million in the third quarter of 2022 compared to $32.4 million in the year ago period. The decrease in SG&A was primarily due to an 8.2% reduction in acquisition-related expenses compared to last year's third quarter. Adjusted SG&A expenses, which adjust for these acquisition-related expenses as well as certain other items impacting comparability, was $16.8 million or 22.7% of net sales in the quarter versus $16.9 or 13.6% last year. This was primarily driven by decreases in marketing and employee compensation costs, partially offset by an increase in insurance expenses. I would like to note two items inside of adjusted SG&A in the period. First, our Q3 compensation expense was lower on a year-over-year basis for the first time since we began acquiring businesses in 2021. We believe this is a positive sign pointing to our successful M&A integration efforts as well as our aggressive cost reduction plans instituted across the year. Second, I wanted to point out that adjusted SG&A was negatively impacted by $1.1 million in higher than anticipated accounts receivable reserves. This largely relates to a single international customer, and so while we continue to keep close tabs on our collection efforts, we have not seen any broad-based deterioration in this area. Reported net loss for the quarter was $23.5 million or $0.52 per diluted share compared to net income of $17.3 million or $0.37 per diluted share last year. Adjusted net loss for the quarter was approximately $15 million or $0.33 per diluted share compared to adjusted net income of $31.8 million or $0.69 per diluted share in the year ago period. Finally, adjusted EBITDA decreased to a loss of $9 million in the third quarter from $16.1 million profit in the prior year period. The decrease in adjusted EBITDA was driven primarily by lower net sales, lower adjusted gross profit margin, as well as the $5.5 million in inventory and accounts receivable reserves and related charges for which we did not adjust in our EBITDA calculation. Moving on to our balance sheet and overall liquidity position. As of September 30th 2022, we had $16.5 million in cash and cash equivalents and an aggregate principal amount of debt outstanding of $126.3 million. As has been the case for the entirety of 2022, we have zero drawn on the company's revolving credit facility. We estimate total liquidity of approximately $78 million as of September 30th, composed of the $16.5 million in cash and cash equivalents. Approximately $62 million of available borrowing capacity under our Revolving Credit Agreement. As Bill noted earlier, we generated positive free cash flow for the second quarter in a row and now have generated over $8 million in total free cash flow in the year-to-date period. We continue to aggressively convert our working capital into cash, helping us to generate positive operating cash flow and enabling growth-oriented capital investments, namely in our more diverse Peat and IGE businesses. While we have opportunity to further reduce our investment in working capital, we feel that generating positive free cash flow in the fourth quarter will be a challenge. However, we do expect that with the level of free cash flow already generated in the year-to-date period, that we will finish the full year on a positive basis, and we expect to maintain a strong liquidity position. Finally, you will see us file a shelf S-3 registration statement later today. The filing is a universal shelf, which covers a range of capital market securities, both on the debt and equity side. We view this as proper corporate housekeeping that will provide maximum flexibility and allow us to access the markets if and when appropriate. I will note that we have no immediate plan to raise debt or equity. With that, let me turn to our full year 2022 outlook. We are reaffirming expectations of net sales in the range of $330 million-$347 million. I would add that given fourth quarter to date sales trends, it is likely that net sales come in at the lower end of our range. Similarly, we expect to finish on the lower end of our previously estimated range of an adjusted EBITDA loss of $25 million-$16 million. This range now includes the negative impact of approximately $19 million of inventory and accounts receivable reserves and related charges realized to date and assumes no further material increase to these amounts. Naturally, we will go through a reassessment of our reserves at year-end, and we'll update you accordingly. In closing, we believe we've put in place the necessary steps to weather the current industry headwinds. Remain optimistic about our long term business fundamentals and our ability to capitalize on the growth opportunities ahead. This concludes our prepared remarks and are now happy to answer your questions. Operator, please open the line for questions. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove yourself from the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Our first question comes from Andrew Carter with Stifel. Please go ahead. Hey, thanks. Good evening. I wanted to ask, so obviously the drawdown of inventory has been a good source of funds here. How much farther can this go? I mean, if I did my math right, and I probably didn't, but I have your purchases down 58% in the quarter. That's behind the organic growth of 47%. Can it be like that, or do you expect some kind of a big catch up here? How much more is there a target working capital, et cetera? I'll stop there finally. Yeah, we've got, I think, roughly $145-$150 million of total inventory now on a business doing, you know, $330-$340 million in sales. So you've still got, in terms of days of supply, good bit of inventory, right? Think of it in two buckets. One is our finished goods in our DCs that we buy from others, and the other is, of course, our own direct materials that we produce our own brands with. I would say right now, because of the, you know, the seesaw that we're all familiar with, Andrew, on the volume, we've got more inventory on the direct material brands that we own side, and that can continue to come down, and we can always continue to tighten on the finished goods side as well. As a part of one of the things we're doing to strengthen the company, we're going through aggressive SKU and brand rationalization processes as well. Taking out more SKUs, taking out brands, cutting down on that inventory, of course, that's gonna give us even more room to take more inventory out. While I'm not gonna give you a specific number of how much we can take out, we think we've got, you know, a good amount of room to keep working inventories down on both sides of the aisle, if you will, finished goods that we buy from others and on the direct materials side. Got you. Thinking about like usually, typically kind of on the same topic, 1Q is your kind of big purchase for the season. I guess as you've gone through this cycle and you go into next year, I mean, how confident are you you can plan for next year, make the right decision, maybe that's something you have to use the credit facility for, about knowing the season and knowing how much you do have to purchase when you actually have to do that going into next year. I mean, we're thinking like 1Q early next year, but just how are you approaching that potential next kind of big decision for the company? Yeah, generally the area that involves the most kind of buying ahead is around the you know, the grow media businesses, right? There's generally a lot of kind of pre-booking of that in the fall. Well, I would say as an industry, there's been a lot less of that this year, and people are not really making these big early buys to get ahead on inventory. I think it's gonna be more, kind of hand to mouth. I mean, there's gonna be a lot if you're a packer, you need to pack that grow media up because you can't catch up if the volume takes off in Q2. But on our side of things, I think many other distributors and other industry players are not really leaning into these big buys. I don't think it's gonna be the same draw that it has been in prior years. We're gonna be cautious. We're not going to lean into it and like you suggested, tap the credit facility simply for inventory. We wanna be careful not to do that and to manage it, you know, as tightly as we can. Doesn't mean we won't touch the credit facility, but it certainly means that we're gonna be very cautious in how we buy in. Thanks. I'll just ask kinda one final question, just kind of on the pricing. I know you mentioned the lighting is in deflation. Or can you give anything on what the pricing ex lighting would be? Then kinda separately, like, are you actually expanding product margins on products outside of lighting just through the pricing you're getting? Thanks. Yeah. You're right, lighting is the one that's under the most pressure. There's a pretty, you know, aggressive promotional scheme out there, although our overall trade spending is pretty much in line with what we expected. There's a promotional environment out there right now, not anything ridiculous. On the product margins, I would say other than Growing Media, we've been doing fairly well, but Growing Media has been tough on us this year. Of course, lighting's been the one that's under the most pressure. Thanks, I'll pass it on. Thanks, Andrew. Thanks a lot. Next question comes from Bill Chappell with Truist Securities. Please go ahead. Hey, good evening, guys. This is Stephen Lengel off for Bill Chappell. Thank you for taking our question. I guess kind of as a little bit of a follow-up to Andrew Carter's question on the lighting inventory. We kinda heard from Hawthorne that they seem to be exiting the LED lighting. Can you kinda provide more color on if this is an opportunity to kinda gain some share over the long term? Or are you kind of expecting to exit the category as well? Thank you. Yeah, we're not exiting it. We are taking out, I think 85% or 80+% of our SKUs in high pressure sodium double-ended lights and also obviously fluorescents, you know, long past now. We're gonna stay in that business. I think some other industry folks are as well. Hawthorne's getting out of it. That's fine. That's their choice. We're gonna offer that to folks. We feel like that high pressure sodium is a tried and true and long proven technology that's still run by an awful lot of growers, and we wanna offer that to our customer base. Obviously we still sell LEDs very aggressively, and we'll continue to do that and compete on that front. No, we're gonna stay in it, but it'll be with a limited number of SKUs. Great. Thank you. You guys kinda mentioned that you were performing well in the Peat business. What kind of color can you provide on some of the progress you've made in the category, and where do you see some maybe further opportunity as we look ahead to 2023? Yeah. We've got a unique Peat business in Edmonton or north of Edmonton, Canada. It came as a part of the Aurora Innovations acquisition. It's called APP, Aurora Peat Products. We've actually been granted last year some additional acreage and bogs, so it's becoming a very nice business for us. Importantly, it sells outside of just an ingredient going into cannabis-oriented grow mixes, right? It sells into different kind of food and floral and outdoor grows and sells into mushroom farmers, a number of different places. There's many channels there that we can develop. It does require capital to develop those new bogs, and we're, you know, I think we spent over half our capital between IGE and Aurora Peat this year, which is appropriate 'cause those are probably our two best performing businesses on the top line side. Peat, we think, is a place that's a unique commodity that's differentiated in its sourcing. You know, it's very tightly controlled by the Canadian government. It gives us an angle that we like as a provider of ingredients and products to other grow mix providers and sellers. We think it's a good business for us. Awesome. Thank you so much, guys. I'll pass it on. Again, if you would like to ask a question, please press star one on your telephone keypad. Next question comes from Andrea Teixeira, JP Morgan. Please go ahead. Thank you, operator, and good afternoon, everyone. Andrea. My question is. How are you? Bill, John, like just on a bit on kind of like going back to your point about getting into the EBITDA guidance, but more on the low end. I'm assuming that implies gross margin is still in the high single digits for the fourth quarter. Then I'm assuming the top line is still. I think top line is still coming okay, given that you are kind of being tactical about how you get rid of the inventory. Thinking of profitability from here, I'm assuming you did mention that you don't see any other write-downs from here. How should we be thinking as we move forward into 2023? Do you think most of it is behind us? Why getting the shelf registration? Is that to avoid or to just being tactical about having the ability to tackle or to draw back in some of the other alternatives other than the revolver? Yeah, Andrea. Good afternoon. Good to catch up. Yeah, no, with respect to, you know, Q4 and what's implied out of our guidance from a margin standpoint, I think you're generally thinking about it correctly. You know, a number of the things that we saw occurring in Q3 from a mix and sales volume perspective or what we expect to continue to emerge into Q4, obviously, there's some seasonality that brings the sales level down. I think that was already implicit in sort of a lot of the numbers I saw floating around out there for us for Q4 even before the call. I think, directionally, that's all right. With respect to 2023, we've got some planning to do for sure over the next couple months, and I think we'll have more to say about like formal thoughts for 2023 as we prepare to report the Q4 results here in the coming period. With respect to the shelf registration, I think it's just, you know, for companies like us, I mean, typically you have a shelf up there available for access if and when needed. Right now, I think as you know, we've got cash on the balance sheet. We've got a fair amount of liquidity available in the line of credit that is completely untapped at this point. Those obviously would be the first places we would go for cash. We, you know, although we've guided and/or offered an outlook that suggests, you know, generating free cash flow in the fourth quarter will be a challenge, you know, we are cautiously optimistic there's some opportunities for us to continue to do that in the future. You know, our last call suggested there's still some opportunity. Our last question rather suggested there's still opportunity in the inventory area, and, you know, we feel that way. Meaning you can continue to, I mean, I don't know if that means in terms of like, what that means in terms of the retail inventory, right? Or the health and how much visibility you have in some of your retail partners, if they still are running high levels of inventory, that may hit you still in the following quarters or you have some good visibility there. You know, we don't have. Certainly it's- No, we don't have there, but go ahead, John. No, I was just gonna make the same comment. I mean, visibility in the specialty retail retailers that we sell into is not perfect because you know it's a very fragmented customer base for us. Mm-hmm. You know, I think it's safe to say they in many cases probably still have pretty robust inventory levels. That's part of the reason I think our sales levels are down. Having said that, commercial, as I think we pointed out in our earlier comments, is a growing part of our business from a mix standpoint. I mean, it's 35% of our sales on a year-to-date basis, up from 19% last year. The commercial part of our business is something we've been leaning into. Okay. Thank you. Thanks, Andrea. Next question comes from Chris Carey with Wells Fargo Securities. Please go ahead. Hi. Good evening or afternoon, wherever you are. Just on the Q4 cash flow assumptions, can you be a bit more specific perhaps about, you know, what the drain is gonna look like? May have missed that number if you had given it. I'm sorry. I don't think we gave a stat on free cash flow, but. In Q4, you're saying that generating cash flow will be difficult. Is there a way to frame that? Yeah, I think, look, I mean, obviously Q4 from a seasonal perspective is sort of slow for us and others in the industry. Just as a result, quite naturally, the sell-through will be a little bit, you know, less dramatic maybe than what we've seen in the last couple of quarters. At the same time, you know, there is a little bit of inventory build seasonally that happens, particularly with respect to our lawn and garden business up in Canada. Those things are some of the things we're thinking about when we sort of err on the side of caution with respect to free cash in Q4. Got it. Just on the comment around the commercial grower versus, you know, hobbyist or, you know, small grower. Are you seeing, you know, noticeable differences in health of these types of customers? I, you know, I appreciate, you know, one has a balance sheet and maybe some cash reserves and the other is kind of, you know, living, you know, day to day, right, from a cash perspective. You know, is this something where there's actually a maybe unappreciated you know part of this channel which is a lot healthier, which maybe is taking share even despite the macro headwinds of the category and you can really go after that customer, take market share and perhaps deliver you know a bit healthier financial results over the next 12 months, even if the category remains under pressure? Can you just talk through that dynamic, please? Yeah, that's exactly how we look at it, which is the commercial multi-state operator or commercial operators are generally better funded and have either a new build going in or a large scale grow and they, you know, are obviously able to support that. We've been, you know, successful there building our percent of total in commercial up to the 35% that we quoted a few moments ago. A lot of that's been driven by the team that we acquired as a part of the IGE business. We have several of our own folks who are focused on commercial. We integrated that with the IGE team, and now we have, you know, a very strong presence in that space. That is an area we expect to continue to grow and certainly think that we can gain market share and expand our footprint in that area. Okay. Thank you. Thanks, Chris. There are no further questions at this time. I would like to turn the floor back over to Bill Toler, the CEO, for closing comments. Please go ahead. Great. Thank you, operator, and we want to thank everyone for joining us today to hear our Q3 results, and we appreciate your support and following of Hydrofarm. Thank you very much. Have a good day. This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.