Good day ladies and gentlemen and welcome to GrowGeneration Second Quarter 2022 Earnings Results Conference Call. Today's call is being recorded. For opening remarks, I will turn the call over to Clay Crumbliss from ICR. Please go ahead.

Welcome everyone to the GrowGeneration second quarter 2022 earnings results conference call. Today's call is being recorded. With us today are Mr. Darren Lampert, Co-Founder and Chief Executive Officer; and Jeff Lasher, Chief Financial Officer of GrowGeneration Corp. You should have access to the company's first quarter earnings press release issued after the market closed today. This information is available on the Investor Relations section of GrowGeneration's website at ir.growgeneration.com. Certain comments made on this call include forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking state statements are based on management's current expectations and beliefs concerning future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. During the call, we will use some non-GAAP financial measures as we describe business performance. The SEC filing as well as the earnings press release which provide reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are all available on our website. Following our prepared remarks, we will take questions from research analysts. We ask that you please limit yourself to one question and one follow-up. If you have additional questions, please re-enter the queue and we'll take them as time allows. Now, I will turn the call over to our Co-Founder and CEO, Darren Lampert. Darren?

Thank you, Clay and good afternoon everyone. Thank you for joining us today to discuss our second quarter 2022 financial results. I will begin with a brief discussion of the challenges that continue to pressure, all aspects of the U.S. cannabis and hydroponic markets. I'll then provide an overview of how our growth GrowGen business is performing. And I'll highlight the aggressive, proactive steps we're taking to adapt, then I'll finish by reiterating our confidence in the longer term strategic plan for GrowGeneration. I will then turn the call over to our CFO, Jeff Lasher, who will take you through the details of our second quarter results and our updated full year 2022 guidance. I would like to start by thanking each one of our employees across our Corporate Center, and 62 retail locations for your continued support of GrowGen channel. It's been a challenging few months. But I've along with the rest of the executive team appreciate your hard work and dedication to our vision and strategic plan. It will not come as a surprise to anyone on this call that the cannabis industry is currently experiencing an unprecedented and prolonged downturn that is negatively impacting all participants across the cannabis value chain, from growers, to suppliers, to retailers. For GrowGen, while our sales and profit generation in the first half of the year have clearly underperformed our original expectations. And while we're planning for the lull to continue to the second half. We remain dedicated to controlling the areas of the business which we were able to control. We identified early the need to proactively make changes in our business. And we're shifting our priorities to put less focus on our five strategic imperatives and put even more emphasis on cost controls, inventory reduction and cash generation. As…

Thank you, Darren. First, I will address our second quarter financial results. And then I will discuss our updated full year 2022 guidance. For the second quarter GrowGeneration generating revenue of $71.1 million versus $125.9 million in the second quarter of 2021, representing a decline of approximately 44%. The decrease in revenues was primarily attributable to a 57% decrease in same-store sales revenue, and an $8.3 million decline in ecommerce revenue. This was partially offset by a $7 million increase in non-retail businesses, including the acquisition and integration of HRG and MMI. into our distribution and other segment, which increased that segment sales to $12 million this quarter from $5 million a year ago. Our same-store sales for the second quarter 2022 were $44.8 million, compared to prior year sales of $104.1 million, representing a 57% decline against the comparable year ago quarter. This comp base includes ecommerce web stores that operated in both periods for 2021 and 2022. Gross profit margin was 28.5% for the second quarter of 2022. up approximately 140 basis points sequentially from the first quarter. Gross profit dollar generation in the second quarter decreased 43% from the prior year, including the impact of additions of acquisitions and new stores in our retail stores, ecommerce and our non-retail segment. Our retail gross margins in the quarter were flat to last year, but aggregate gross margins benefited from the decline in ecommerce volume as a percentage of total sales from 10% revenue to 5% of revenue, as well as an increase in mix of distribution and other segment revenue from 4% of revenue to 17% revenue. The distribution and other segment has meaningfully more favorable gross margins than the retail and ecommerce segments. We did have a significant headwind on a gross margin basis percentage basis from…

Before we open the line for your questions, I want to reiterate that while 2022 is not shaping up, as we initially expected, we were making the tough decisions necessary to ensure we're in the best place possible to emerge stronger than ever, when the industry eventually turns around. We're actively focused on the areas of the business that we can control. And we acted quickly beginning back in January to reduce costs and prepare to weather the industry downturn. We accelerated those efforts even further during the second quarter by delaying a few of our strategic goals this year in favor of right-sizing our core structure with significant workforce reductions, including a couple of high-level executive positions and store account rationalization. As an update on our five key initiatives, our ecommerce sites have been combined, and we're actively working on efficient operation of profitable web stores. We've opened five new and relocated locations but scaled back near-term openings considering the industry wide sales slowed down. Our technology improvements are delayed until later this year. We continue to expand private label penetration was 11% of retail sales, from brands that we have control over and our distribution and other segments continue to be an area that shows the incremental revenue and beneficial margins. We have not changed investment activities in any segment. We remain committed to the expansion of our proprietary and distributed brands outside our own retail locations into 750 independent locations. We are very satisfied with the results of both Char Coir and Power Si and are very excited to have introduced Drip Hydro nutrients and additives. The addition of MMI strengthens our position to gain indoor vertical cultivation projects with their leading benching and racking systems, controlled environmental agriculture and sustainable ag are only in a developmental stage. And we believe more local communities will invest in sustainable indoor vertical farms for local production of leafy greens, tomatoes, fruits and other food products. GrowGen remains on solid financial footing with a strong balance sheet, a healthy liquidity position, and solid cash generation. We're confident that when the cannabis cycle turns, and the excess supply in the marketplace, eventually normalizes, GrowGen will be well positioned to recover quickly with a more attractive expense structure on a lower G&A base from which to build. Thank you for your time today. And thank you for your support in GrowGeneration. We will now take your questions. Operator?

Thank you. [Operator Instructions] We'll take our first question from Scott Fortune with ROTH Capital Partners. Please go ahead.

Good afternoon. Thanks for the question. I just wanted to focus, Darren, obviously long exposure in California and [indiscernible] of your store base there. We're seeing cultivation license is up for renewal in October and sounds like maybe California cultivators are not planning this year or renew license and ongoing pressure for a lot of the small growers. What's your sense of California kind of that playing out the rest of the year? And then your footprint in California from the store base side of things? Thanks.

Yes, Scott. As you know, Scott, California is the epicenter of cannabis and always will be. There is a tremendous base of cultivators in the state of California. And there's also a tremendous, this tremendous illegal market coming out of California, and we believe you will see an equilibrium somewhere. You've seen positive events in California over the last few months with the state tax, giving back almost $160 a pound for the cultivators out in California. We've seen a very slow outdoor season in California which usually bodes well for the indoor markets. Our bread and butter in California is the legal markets, it's the indoor growers. So we feel pretty comfortable with where the market is. And we opened a store in LA last year that is progressing well. And our California stores albeit down have been stable over the last few months.

Got it. I appreciate the color there. And then, can you provide a little more touch points from the top customers on the commercial side versus small operators kind of the ordering, kind of in California will [turn those to other] [ph] pressure states. What percentage of revenue is driven from kind of recurring fertilizers and mediums now versus more the equipment purchases overall for your business?

Yes. I think what you've seen this year, Scott, with the downturn in the cannabis markets and the downturn in the capital builds, we have probably seen a shift to about 75% on the consumable products and 25% on the capital build products. But we do believe, with the growth of this industry, you will see a resurgence of capital build projects in the future. When that occurs, we just don't know right now. I'm just seeing some positive talk right now on Capitol Hill, from Schumer and Booker. More articles were out today. I see you're starting to see that compromise going into the internal elections. And like anyone, we certainly have our fingers crossed. And as you know, the cannabis markets right now are about a $20 billion market. And the [indiscernible], though, are 100 billion by the end of the year. And when you compare it to the wine and spirits market is almost at that trillion dollar mark, we think there's tremendous upside. But in the growth of any industry, you do see ups and downs. And unfortunately, right now, Scott, you're seeing downs, you heard it from Hydrofarm and Hawthorne this week, and the markets have been tremendously challenging. And GrowGen has taken all steps that we can and we will continue to take steps to stabilize this business and bring it back to profitability.

Thanks for the color. I will jump back in the queue. Thanks, Darren.

Thanks, Scott.

We'll take our next question from Aaron Grey with Alliance Global Partners. Please go ahead.

Hi. Good evening and thank you for the questions. So first question for me, as well look the broader cannabis landscape in your customer base. So capital markets environment very difficult for them right now, which always kind of has been given federal illegality. And that creates difficulty in retaining an ROI, particularly when we think about the 280 headwinds that your customers face. So I guess my question is, as we're kind of facing this reset now, oversupply in key markets, pricing pressure which makes it even more difficult to be profitable, especially cash flow with 280e? How do you think about, changes that are going to be needed at the federal level to really get that shift back to where you might have been last year? And do you think safe would be enough for that, if 280e was not being included? And it was more just out of the depository banking side? Thank you.

I think to start with Aaron, the SAFE Act certainly brings legitimacy to the markets, which I think everyone is looking for. We all know that, build outs and new facilities cost a lot of money. And right, what you're seeing right now is on the cultivator side, they're also preserving cash to the future. So what you're seeing is just a tremendous amount of individuals that are just, they're happy with what they have right now. Again, if the industry stays at the level it is right now, there's enough facilities to handle that. So the really the question that we'll have and I think it's more of a question for the American public, is the cannabis industry going to grow from where it is today to where the estimates are in the future. And we still do believe that in the future, you will see a tremendous amount of business coming in from typical ag and indoor growing, which should be a boost for the hydroponic and the CEA industry on a go forward basis. But we do believe that the SAFE Act will give a boost to the markets, it'll give a boost to the capital equipment markets. And what you're seeing right now also is, as new states come on board albeit much slower than we expected. There are capital builds right now going on in New Jersey and New York. You're seeing them starting in Mississippi, but very slowly, Virginia, Missouri. So you're starting to see builds -- we are seeing builds all the time, but just not at the same levels we saw a year ago.

Okay. Appreciate that color. That's really helpful there. And now it's giving you guys, cash distribution, which still remain strong, you mentioned about how you don't need to take on any more equity or debt. And you guys are taking your own initiatives on the expensive side. On the flip side of it, I'm sure you guys are better positioned than many of your competitors, and even other people within the hydroponic supply chain, potentially. So, during these times, maybe not novel, how do you think about [indiscernible], getting more aggressive and finding M&A opportunities? Is that not something I think about on horizon? Is that something you might be seeing that it's on the mind people more cash constrained, while dealing with fundamental, headwinds that you guys are as well. So love your outlook in terms of whether or not there would be M&A that might be opportunistic right now, for you guys. Thank you.

Aaron, I think you know me well enough and you know the company will enough. If there's a deal on the table that makes sense for GrowGen, we will look hard -- certainly hard at it, whether it's on the product side of it, or on the store side of it, if it's accretive and then it's for the right price we're always looking. Right now, it has to be the right price. And we look at deals all the time still. But fortunately, unfortunately, we haven't pulled the trigger. We pulled the trigger on two deals earlier this year. One was, I think, the last day of December, MMI and we bought HRG this year. And we're very satisfied with both of those acquisitions. So it's not that we've been that quiet this year, we have done some acquisitions and store openings. But right now, we're balancing the two. And if something comes by our desks that we believe makes sense. And as for the right price, we certainly will take a hard look at it.

Okay. Great. Thank you very much for the detail. I will jump back in the queue.

Thanks, Aaron.

We'll take our next question from Ryan Meyers, Lake Street Capital Markets. Please go ahead.

Hey, guys, thanks for taking my question. First one for me. So the three or four stores that you plan on opening, just kind of curious what your level of confidence is that you're going to be able to generate some solid business out of these in the near term. And really any color, almost three to four openings would be helpful.

Couple things, they are new markets Ryan and we do feel quite comfortable. We have business in those markets already. We have a very vibrant commercial team out there. So these aren't new states for us, they just new states for us with locations, to better serve the cultivators and growers in those states. The stores that we're building in New Jersey, Virginia, and Missouri are smaller than our average stores. So we'll definitely supply them to our supply chain. But we're quite confident they will get these stores profitable, as we did with Ardmore, Oklahoma about six months ago.

Okay. That's helpful. And then, Darren, you kind of alluded to this on the call. But given the tough cannabis market, what kind of opportunities are you guys seeing out there within CEA vertical growing, indoor growing for agriculture? And do you have really anything in the pipeline there?

It's still been very slow. We see certain transactions on the hemp side of it. But on the other side of it, we're starting to see it -- we're starting to sell some products into the colleges that are starting to build greenhouses on premises. But it's been a very, very slow uptake. We think it's going to be a 2023 project for GrowGen. We've certainly been working on our business this year. And 95% of what we do right now is into the cannabis space. So we have plenty of work to do on our other side of the business. But we do believe in the next couple of years, you'll see that industry starting to gain some traction.

Got it. Thanks for taking my questions.

Thank you, Ryan.

We'll take our next question from Andrew Carter with Stifel. Please go ahead.

Hey, thanks. Good evening. I guess the first thing I wanted to ask and backing up on the initiatives, I want to have kind of an understanding where you are in terms of harmonizing. Number one, are all your stores and distribution centers kind of integrated from a back office perspective, ERP where you have visibility, and then on the new distribution centers, are they in the place where they're starting to enable the company's supply chain? Or is it still kind of test and learn and not really benefit until kind of 2023? Thanks.

Jeff, I'm going to send it over to you.

Yes, Andrew. So just so you understand. On the store side, the 63 stores are connected together. There's a variety of systems that we use within the organization, the retail store side, all of the acquisitions that we have acquired over the last couple years get plugged into our systems, the same day we acquire them and we start receiving data and information from them. We do have a technology investment that will go in next year that will supplant that and provide better efficiencies for us. We're still doing quality control and validation. And some exercises on that technology investment. The distribution centers, we have one active and we have one that's still waiting on final development, which will be in Ohio, they will provide opportunities for us to be more efficient in the distribution of our private label business, as well as our own distributed brands business, which is their primary focus in the near term, and then longer term, the capabilities to service the stores with a variety of different products as well as ecommerce delivery deliveries. So we're looking forward to that as we build out the network, but the primary benefit for the distribution center strategy will really be longer term.

Okay. Yes. I'll be offline and will confuse on the first. And second question I want to ask is, you have visibility, what's going on the competition out there, are kind of competing private label retail, hydroponics retailers trying to hog on is the rationalization going as the new states are opening? Are you seeing them start to open right alongside you where you're planting flags, but anything you can help us to give us about how the competitive sets points? Thanks.

Yes. I think, Andrew, what you're seeing from competition right now is lessening. We haven't seen many new store groups pop up of late, most -- really just opened a large store in Mississippi, I think we're probably the only one in Mississippi right now. So I think you're seeing the doldrums straight around the industry right now. Everyone is feeling it. You heard it from Hydrofarm, you heard it from Hawthorne. You heard the degradation in their sales going on in 2022 and that's from the individual stores, not mine. So we do believe that, we hear from stores every day. So we certainly have the ear to the ground and we understand what's going on in the industry and I think the competitors are probably feeling it worst than GrowGen.

Thanks. I'll pass it on.

We'll take our next question from Eric Des Lauriers with Craig-Hallum. Please go ahead.

Great. Thank you for taking my question. So you've mentioned this increasing mix of private label. You also mentioned some of these newer stores are going to be a bit smaller than perhaps what we're used to seeing. Certainly you’ve gone through a bit of an evolution here and it sounds like so far in ‘22, it's been sort of a cold heart assessment with some of these noticeable changes here. I was wondering if you could maybe just give us sort of an updated kind of North Star of what you guys are looking for, whether that's a mix of ecommerce versus retail, overall store sizes like, can you just give us a sort of high-level overview of how your North Star or strategy has shifted within the past six months gone? Thanks.

Yes. Couple of things, Eric. One, I don't think we've shifted that much. We have been steadfast with our private label rollouts, looking to go from where we started, I think a couple of years ago 2%, we’re now at 11%. So we've been pretty steadfast on that. Store acquisitions this year, we have slowed down and we told Wall Street we were slowing down store acquisitions and going to an opening platform this year albeit much less than we thought as we work on the business and work through the downturn of this industry. Anytime you see a slowdown in an industry, you need to caution yourself, and I think that's what GrowGen is doing right now. Our margins this year at 28.5% this quarter, I think was a phenomenal feat during these times. As Jeff mentioned in his call, our shipping costs this quarter were over three times the norm back tests. So we've done a tremendous job managing supply chain bringing inventory down and also bringing payroll down. You're looking at a $13 million drop this year in overall expenses. But GrowGen’s thesis has not changed. It may have slowed down for the time as Wall Street has backed out and we do believe that the Federal government has slowed the industry down for the time being. But we do believe that you're in the first inning of a nine inning game and that's always been what GrowGen told Wall Street. That in the early innings every once in a while, things slow down, and they have slowed and we are working through it. We've kept our balance sheet strong. We're bringing inventory levels down and we're continuing to do business every day and help the cultivators and the growers in the United States do what they do.

Okay. That’s helpful. Specifically on sort of private label, ecommerce, and inventory, can you just kind of give me a sense of how you're envisioning all those sort of evolving throughout the year. Or maybe even beyond as it relates to ecommerce and retail and sort of looking for what's your target mix of retail versus ecommerce is? If we're going to see a bit more of a push towards this ecommerce or omni-channel as you are looking to slow down some CapEx spending and conserve some costs. So, maybe just kind of touch on how you're looking at your ideal mix of retail versus ecommerce and then Jeff, maybe you can just kind of comment on how we should think about your ability to further wind down inventory throughout the year? Thank you.

I will start and I can turn it over to Jeff. We are in the process of remodeling our online site, and you will see a new rollout by year end hopefully sooner. As we stated early, we've integrated our sites Agron and growgeneration.com. Agron was specifically a commercial ordering site. Most of the business was big build down, it was lighting, dehumidification control systems and that part of the industry has slowed dramatically. So we have done is, we've pivoted, we are redoing our sites. I think they're in final development right now and will be two sites in one both looking for business from the individual growers and the larger cultivators, but not as much weighted towards the large commercial builds. The stores, its business as usual, private label traction within our stores are 11% of sales and going higher. We just learned, we just launched Drip Hydro, which is off to a great start, which we believe will increase our private label sales going into the third and fourth quarters this year. So I believe business as usual at GrowGen, albeit, again, we’re waiting for a turn in the industry and as we wait for the turn, we believe we've made this company better this year. We've reduced costs tremendously. We are working on our balance sheet and then we're doing what needs to be done right now. And we do believe that the industry will turn, it may not be this year and maybe next year, we'll be going against much smaller comps next year. We're against the blistering comps from the first half of last year, as you all know. So we'll see where the industry goes, we'll see where, into the interim elections if something gets passed on the SAFE Act or a combination of a couple of the different acts out there. But we still are very positive on what we built at GrowGen. We have 62 stores and we have three different divisions of GrowGen and they're all performing.

As far as the specific inventory actions that we've taken and progress we've made on the inventory side, we ended the year with $106 million of inventory, $105.6 million that included the legacy business from 2021 as well as the acquired inventory when we acquired MMI. It went up to $106 million at the end of the first quarter, and then down to $99 million at the end of the second quarter. We have seen a decline in our inventory for the retail business over-time and that retail business declined for inventory continues to progress through the third quarter and we have seen an investment that we've made on the HRG side to expand that business and we've plateaued on that investment in other words, we don't need a lot more inventory. We do have some timing issues when it comes to some of our private label inventory that we bring in throughout the year on a seasonal basis in preparation for peak seasons and that ends up with some variances quarter-to-quarter but our plan is to continue to address inventory and keep the focus on our inventory as an opportunity for us to generate cash in the near-term.

Okay, great. Thanks. Appreciate the color.

We'll take our next question from Andrew Chasanoff with Oppenheimer. Please go ahead.

Hi, thank you for taking my question. Just -- in regards to top-line behind like all the current industry noise, is there anything that gives you or anything that suggests potential rebound in sales once we get through the back half of 2022? And then, I guess just in regards to Darren's prepared remarks, I guess what gives you confidence that the current sales wall is more cyclical in nature rather than structural?

The answer to that is, Hawthorne's sales were down 63% in the quarter, I think Hydrofarm probably more so you've heard from our suppliers and you've also heard from again, we understand the state of the industry. So we do believe that GrowGen is holding up much better than our peers and the rest of the industry. Like anything else if you believe in the forecast for the underlying industry, which is the cannabis side of it, the cannabis growers, and you believe in the growth forecasts, the industry is in a low right now, which will come back. If cannabis sales decline and don't go forward, like forecasted, you may see some other -- you may see some more severe issues with this industry. But from everything you hear out there, and from the American people, you're hearing over 75% acceptance of cannabis right now and you're still seeing states that have not built out and people unable to get cannabis that we still believe is a tremendous traction for this industry. And I think you've heard it from most of the cultivators out there, the MSOs, everyone still will tell you that this is the early innings of an industry and it's the making of an industry and like anything else it takes more than a few years to make an industry. It’s the same thing happened with alcohol coming out of prohibition.

Okay. That's very helpful. And I guess maybe my second question is, do you guys consider like further legalization necessary for the intermediate to longer term growth of the -- I guess GrowGen or the industry as a whole?

We don't. But I think what you certainly will need is the SAFE Act with certain other help from the Federal government. If the cultivators can't make money, it's going to be quite hard for them to continue in business. So what you're seeing right now with 280e which is the tax ramifications to the growers and the lack of money coming in through Wall Street, building facilities is quite expensive these days. Capital has to come into the industry and without the SAFE Act, Wall Street has pulled back and we do believe that there are a bunch of different bills right now that are pending and going into the interim elections and we do believe that there is a likelihood that something does get passed, that we do believe will bring tremendous help to the industry.

Great. Thanks very much.

We'll take our final question from Glenn Mattson with Ladenburg. Please go ahead.

Hi, thanks for taking the question. Most of them have been asked already. But just one more on the inventory, maybe can you just talk about the possibility of any obsolescence or anything like that? Is there a large portion of that made up of like equipment that's just not moving right now that won't be as viable six or nine months down the road or something? And then, what would be like the ideal days of inventory or what kind of level are you targeting, as you kind of plateau at this lower level which perhaps might last for a little while?

Yes. So on the obsolescence opportunity or risk of the organization, we review that on a regular basis and adjust our inventory based on lower of cost to market analysis that we do and try to position our inventory for the accounting purposes to reflect that risk. As far as opportunity to sell some product that lower than the normal margin that's a decision that we make on a regular basis and I think we mentioned that in the scripts that we are looking at some opportunities to discount in order to move some inventory off. Not a dramatic discount that we're selling below cost, but one in which we're aggressive in the marketplace to move product and gain market share over the course of the back half of the calendar year. As far as the opportunity for us to improve our gross margin return on investment of inventory, or inventory turns, we're obviously always looking at opportunities for the right sizing of inventory but it's also important to recognize that we need to service our customers with a selection of products in our stores that are readily available. So there's a balancing act between the need for inventory to maintain the sales and the market share in the marketplace, versus the pure spreadsheet analysis that would define a lower set of inventory and we're constantly reviewing that and adjusting our inventory targets levels based on that balance.

Okay. Thanks for that color. And then just quickly on the cost cuts, would you expect this to flow through rather quickly or just some cadence? Thanks.

We expect our Q3 cost structure to reflect the number of actions that we took in Q2 and for our Q3 cost structure to be lower than Q2.

Okay. I will take up more offline. Thanks very much.

Ladies and gentlemen, this concludes today's question-and-answer session. I will now turn the call back to Clay Crumbliss for additional closing remarks.

Thanks, Steve. And thank you everyone for your interest in GrowGeneration. Please reach out to ICR with additional questions at growgenir@icrinc.com and we look forward to updating you on our 3Q results later in the year. This concludes our call.

Ladies and gentlemen, we appreciate your participation. You may now disconnect.