Q3 2022 Columbia Care Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Thank you for standing by and welcome to the Columbia Care third quarter 2022 earnings Conference call. At this time, all participants are in listen only mode.
After the Speakers' presentation there'll be a question and answer session to ask a question at that time. Please press star one one on your touch tone telephone.
The amount of today's conference call is being recorded.
Now I'll turn the conference host MS. Liane Evans Senior Vice President of capital markets. Please go ahead.
Thank you operator, good afternoon, and thank you for joining Columbia care third quarter 2022 earnings Conference call with me today are Nicolas Peter Our Chief Executive Officer, David Harker, Chief Operating Officer, Derek Watson, Our Chief Financial Officer, Jeff Buchanan, our Chief risk Officer.
Today, we issued a press release reporting our third quarter 2020 results, which we also filed with the applicable Canadian Securities regulatory authorities on SEDAR and the U S Securities and Exchange Commission on Edgar a copy of this release is available on the investors section of our corporate website, where you will also be able to access a replay of this call for up to 30 days.
Please note that the remarks, we make today regarding future expectations plans and prospects for the company, including statements relating to the crest of the last transaction constitute forward looking statements within the meaning of applicable Canadian and U S Securities laws actual results may differ materially from those indicated by such forward looking statements as a result of various important factors, which we disclose in more detail.
And the risk factors section of our annual Form 10-K dated March 31, 2020, Q as filed with the applicable regulatory authorities and its subsequent securities filings.
We remind you that any forward looking statements represent our views as of today and should not be relied upon as representing our views as of any subsequent date, while we may update any such forward looking statements in the future. We specifically disclaim any obligations to do so except as otherwise required by applicable law also please note that on today's call, we will refer to certain non-GAAP financial measures such as adjusted EBITDA.
These measures do not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies.
Take care consider certain non-GAAP measures to be meaningful indicators of the performance of this business. In addition to but not as a substitute for our GAAP results. A reconciliation of such non-GAAP financial measures to their nearest comparable GAAP measure is included in our press release issued earlier today.
With that I will turn the call over to Nick Luff me that Theyre going to started Nick.
Thank you Leigh good afternoon, everyone and thank you for joining the call.
Actual results for the third quarter demonstrated once again the value of the embedded growth in our strategic footprint and the operational excellence. We've developed as we capitalize on the transition to adult use in emerging markets and as we work to protect our operations in a more mature stage.
In the beginning we recognize that markets would mature and experienced different points in their lifecycle is at various times in Q3, we have some markets like new Jersey that were up over 75% sequentially and revenue, while others, such as Maryland showed sequential declines.
Our decision to develop a diverse national platform that has enabled us to hedge these natural market cycles.
And another challenging environment, we achieved solid sequential top line growth and standup profitability improvements with revenue, increasing two 4% sequentially to $133 million in the quarter and adjusted EBITDA improved 74, 5% over Q2 to $21 million.
Our adjusted EBITDA margin improved approximately 650 basis points over last quarter we.
We continue to drive growth in our emerging markets, such as New Jersey, Virginia, and West Virginia, two of which are now among our top five markets by revenue and EBITDA.
As we discussed last quarter, we continue to leverage our expanding scale, while also implement proactive strategies in mature markets as they mature and rationalize.
David will discuss in a few minutes, we have executed upon our plan and have shown material improvement in both our California, and Colorado operations in the space of one quarter, which is one of the reasons. We achieved a 74, 5% sequential improvement in adjusted EBITDA in Q3 versus Q2.
Another reason for the surge in profitability as our concerted effort to capture efficiencies and drive costs out of our system and the receptivity of our products in a hole in the wholesale market.
As we discussed last quarter, we made tactical investments in our infrastructure and cultivation operations that have significantly lowered the production costs for both harvested flower and packaged products.
Across our national footprint.
Trimmed flower cost per Gram has continued to trend downwards and in Q3 was the lowest we've seen in seven quarters. Meanwhile, flower quality has consistently in a materially improved.
These improvements and enhanced capabilities have enabled us to introduce new phenotypes and optimize them to their full potential.
As has been shown in every market condition, there is direct correlation between product quality and pricing.
During prior earnings calls, we stated that we expected to see the positive impact of the capital investments. We made in the back half of 2022 and that benefit has begun to materialize.
Made significant progress on those initiatives during Q3 and is reflected in our financial results and it has positively impacted both our momentum at our cash flow.
David and his team have worked tenaciously to drive efficiencies across our operations and module production is needed to address supply demand issues market by market.
The strategic decision to prioritize quality production and efficiency combined with the heightened efforts to manage costs as we face persistent headwinds have generated results 16 of our 17 markets generated positive EBITDA in the quarter, our smallest market by revenue, Missouri was the outlier despite revenue increasing more than 30% sequentially.
Driven by the growth of our wholesale operations price compression impacted margins.
Strong execution at the operating level and significant improvement in profitability is even more remarkable given the challenging environment that we're operating in consumers remain under pressure due to macroeconomic headwinds and we've seen basket size is declining as a result, we are fortunate to have house brands that provide consumers with selection and value while supporting gross margins is.
Well as high growth markets that provide meaningful upside and potential to revenue and profitability.
In Q3.
Our in house flower brands made up over 60% of flower sales in Colombia care locations complemented by steady to improving foot traffic.
Derek will give you an update on our outlook in a few moments, but suffice it to say strong execution continues to drive growth on both the top and bottom line.
<unk> is well positioned today and recently transitioned markets such as New Jersey, and soon to be transition markets, such as New York, and Virginia and as of last week. The newest states to approve adult use via a voter referendum, Maryland in Missouri, I am extremely proud of the Columbia care team and our ability to grow profitability, particularly in this demanding environment.
Before turning the call over to Derek allow me to give you an update on our merger with Chriscoe labs recall that both companies will be divided divesting certain assets as we work through the regulatory approval phase ahead of or ahead of closing our transaction, which is anticipated around the end of Q1 2023.
I'm very pleased to note that on November 4th we had our first divestiture announcement as we will divest assets in New York, Illinois, and Massachusetts to an entity owned and controlled by Sean Combs, who is good.
Creating the largest Blackstone cannabis company in the world.
Total consideration for the transaction is an amount of up to $185 million and it is expected to close concurrently with the closing of Colombia, Colombia care acquisition by Chriscoe Labs. This is a major step in closing our merger we continue to work towards finalizing the remaining asset sale agreements and are making progress as we work through the regulatory approval process.
As you've heard me say before the current economic environment and the opportunities afforded to Colombia carrying presto by our combined scale reaffirm our decision to merge.
Together, we have access to both mature and emerging markets, we will have market, leading retail and wholesale operations. We will have one of if not the strongest brand portfolio and we will have highly efficient operations and finally, we will have the best of both organizations to successfully execute on our growth strategy and lead the cannabis industry with that I will now turn the call.
To Derek to review, our financial results and outlook in more detail Derrick.
Thank you Nick and good afternoon, everyone.
I'll provide a summary of the key financial results for the third quarter discuss our outlook for the rest of this year and briefly address the status of the <unk> transaction.
Revenue in the third quarter was $132 7 million, an increase of two 4% sequentially and 0.3% year over year, when compared with Q3 of 2021.
The sequential increase was driven by continued growth in several of our emerging markets, including New Jersey, Virginia, and West, Virginia, as well as improvements in California and Colorado.
With markets that had experienced revenue declines in Q2.
Sequential growth was achieved in spite of a decline in average basket size and the majority of our market.
Section of the continuing economic challenges facing our customer base.
There were no new retail locations added in the third quarter that we have since opened up our fifth retail location in Virginia.
In Q3 retail revenue was up a little less than 1% sequentially, while wholesale revenue increased 14% sequentially and represented 16, 5% of total revenue in the quarter.
The stabilization and operating improvements, we expected to see in California, and Colorado have also begun to materialize and David will discuss both of these markets in detail.
Adjusted gross profit for the third quarter increased sequentially to $56 9 million up from $55 1 million in Q2, resulting in an adjusted gross margin of 43% flat with Q2.
Adjusted EBITDA of $21 million was up more than 74% from the second quarter.
Reflecting the impact of maintaining our gross margins as revenue increased and our cost reduction initiatives, particularly in SG&A expenses decreased 3% sequentially.
At a market level, New Jersey, and Colorado demonstrated the largest sequential increase in EBITDA on a dollar basis, continuing the trend for New Jersey, and reverting last quarter's decline in Colorado.
We ended the quarter with $50 million in cash.
Continue our cost management discipline, and a focus on preserving cash and deploying capital efficiently.
You also want to remind investors that we strengthened our capital structure with a private placement of $185 million in nine 5% notes in February price in market volatility and rising interest rates.
Capital expenditures in the quarter were approximately $11 9 million down from $29 1 million in the second quarter and in line with our forecast of around $20 million for the entire second half of 2022.
Spending is focused on supporting plant openings in Virginia and cultivation projects on the East coast.
Regarding the <unk> transaction and as Nick mentioned, we're pleased to have made our first significant divestiture announcements for the Illinois, Massachusetts, and New York markets.
Progressing with negotiations and the remaining market, the Florida, Maryland, and Ohio, where divestitures are required and we will make further announcements as soon as we're able to.
Turning to our outlook for the balance of this year.
Reflecting the continued economic headwinds in our Q3 performance, we expect to see flat to low single digit revenue growth in the fourth quarter.
From an EBITDA perspective, we are encouraged by the impact of our profit improvement initiatives and expect to see another sequential increase in EBITDA, maintaining our margins in the mid to high teens in the fourth quarter.
As usual this outlook does not assume any changes in the regulatory environment in any of our markets.
With that let me turn the call over to David to cover operational highlights David.
Thank you Derrick for the next few minutes I will highlight important operational developments during the third quarter, particularly in our top markets on a revenue basis, our top five markets alphabetically, California, Colorado, New Jersey, Ohio, and Virginia on an adjusted EBITDA basis, our top five markets where Colorado.
<unk>, Ohio, Pennsylvania, and Virginia.
I want to highlight that New Jersey, and Virginia are both now in the top five in West Virginia grew revenue grew 20% sequentially all encouraging sign of what's to come for our emerging markets.
At the company level as Nick mentioned, the continued improvement in cultivation productivity and efficiency has led to the declining trend in cost per gram of trim flower with Q3 costs decreasing approximately 5% sequentially to reach the lowest level in seven quarters or.
<unk> growth has continued with success in third quarter, including launching the very first pre rolls in the New York market under our seat and straight line its 14th market launching our premium award winning Triple seven in Pennsylvania, it's 10th market.
<unk> brand launched disposable vape and is now available in 14 markets subsequent to the quarter close launching of new cannabis infused edibles brand called <unk> in six markets.
Now to discuss to discuss some markets in more detail in California. The market has stabilized as we expected during the quarter, we achieved an improvement in flower quality, resulting from our relentless focus on improving operational efficiencies across the state. We also made supply chain and operational changes to improve margins. This has allowed us to continue to produce extremely high quality.
<unk> with exceptional yields and potency results, specifically, we are averaging potency of 30% THC with some strange testing over 36% THC and 38% THC we.
We also experienced significant competitive pricing pressure for manufacturing goods bulk and packaged flower due to market saturation in the economic climate is still saw sequential improvement.
In part to improved price discipline in our wholesale business and improved retail gross margin.
In Colorado, we saw some pricing stability in the market compared to last quarter that was largely due to our improved product offering there.
There is also less market instability, which we anticipated on the manufacturing front, we ramped up our production to account for store needs due to the initial success of our growth strategy, which includes the launch of new products Amber cartridges, heavy gummies and distillate cartridges.
We expect to have substantial inventory of these products in our stores later this month and will be introducing gummies and other products in Q4.
Usable flower in grams per square foot in Colorado were up more than 110% compared to Q3 2021 is evidence of the improvement in our cultivation operations joined.
During the quarter, we had our first harvest from the second cultivation facility in New Jersey with total capacity.
70000 square feet as we worked on establishing new and enhanced existing wholesale relationships. We are currently working with multiple new license winners to create future wholesale opportunities for Colombia care.
Q3, New Jersey revenue increased 74% sequentially with our two active dispensaries being some of the best performers in our portfolio. We also launched.
Multiple new Skus and product line extensions, including press Odt's pressed too.
Heavy amber fabricators and more as demand increases we will be able to scale our operations at the second cultivation facility and take advantage of the growing wholesale opportunity.
Turning to Ohio, our product mix with a sales catalysts and significantly improved our market and our position in the market. We completed our Mount cultivation expansion in Q2, which in Q3 allowed us to introduce 10, new cultivars and two new brands, we expect more than 70, new dispensaries to open in Ohio by mid February of 2023, which will provide additional.
Wholesale opportunities.
In Virginia.
We saw the benefits of our completed Portsmith facility expansion at the end of Q2 2022, which.
Which has allowed us to increase our harvest by Forex looking forward, we still have room to expand our current garden as demand increases. Additionally, automated flower packaging has significantly increased throughput at flower production fueling efficiencies and capability for wholesale.
Also a regulatory change on July 1st to expand patient access by simplifying medical card processing proved to be a tailwind in the quarter by increasing traffic in our dispensaries.
Additionally, we opened a new dispensary last week and Cary Towne, bringing our active total in Virginia to five we have seven additional locations in development in the state to create the market leading footprint of 12.
In Pennsylvania, we were more dynamic with our pricing in Q3, which made us more competitive. We also launched classics headwinds included wholesale pricing pressure strong illicit market and lower active patient counts. Despite these.
Headwinds, we continue to drive scale in our section facility that will enable a more price competitive position in the wholesale market.
To summarize I am pleased with the continued efficiencies that we're building into our operations. The progress we have made on increasing yields and potency and a strong operational execution at both the manufacturing and dispensary locations I will now turn the call back to Nick and we will take your questions.
Thank you David when we look forward to taking your questions. Operator can you. Please open the line.
Thank you again, ladies and gentlemen, I'd like to ask a question. Please press star one one on your touch tone telephone again to ask a question. Please press star one one.
One moment please.
Our first question comes from angry of allegiance your line is open.
Hi, good morning, or good afternoon. Thank you for the questions and let's see the <unk>.
Building improvement so one focus on Colorado for a second you talked about that market improving so that was great to see over the quarter.
Just wanted to get some color in terms of your outlook there. It sounds like things are continuing there with the <unk> guide, but specifically regarding crop tober into the wholesale market. There I know just in years past there's been some volatility.
So would love to hear more in terms of how you think the sustainability of that market, having improved might be able to persist for the next couple of quarters. Thank you.
Sure. Thanks, Darren Let me, let me turn this over to David Heart, and then follow up with any any gaps.
Sure. Thanks for the question. So I think in Colorado, we continue to be I mean, frankly focused on our supply chain throughout throughout the state.
We are seeing an improvement in our market share at the retail level on a month over month quarter over quarter basis, and so we're.
I mean, arguably hyper focused on making sure we're being fully stocked in our stores, both with third party products that matter, but as importantly, if not more importantly, putting more of our internally derived product on the shelf with I think we highlighted new brand introductions and improved yields out of our steel location.
The wholesale market.
I think there's probably been historically more volatility.
From a price point perspective in Colorado than most of the other.
Adult use markets. So while many I think are looking for continued price declines I think it's largely going to be dependent on total canopy in the state over the next several quarters.
And so I.
I think thankfully, we are hyper focused on our internal supply chain.
We are active in the wholesale market, but for I would say for the next quarter or two we are going to be hyper focused on putting products on the shelf to dry back.
Foot traffic into our stores and continuing to take retail market share. So I think.
Yes, I think your guess is probably as good as anybody's as it looks to 24 months out or 12 months out, but I do think historically, you've seen canopy flex up and down in aggregate in that state more more pronounced or embedded volatility than most other markets and I would anticipate that to be the same on a go forward basis.
Yeah, Eric the only thing I would say is just piggybacking on something that David said.
A lot of the dynamics that we've talked about over the past couple of quarters, which as you've seen people selling inventory to generate cash flow rather than profit. So you've seen a lot of smaller players having a difficult time staying open.
That natural rationalization in the market cycle, I think has really taken hold and we're starting to see that.
That's good news because it means that if you're the incumbent coming out of that.
Cycle, you end up being very strong so we're cautiously optimistic and I think that the way we've couched it to sort of the street is all we're looking for stability for the rest of the year, which I think we've gotten in.
In that environment with the improvements we've made in infrastructure, we ought to be able to we ought to be able to sort of reverse the course that we saw in the first half of the year.
Okay, great. Thanks for that and then second for me on New Jersey, and ICEE sales up seven 4% quarter over quarter I'm, just curious in terms of the incremental cash.
Perhaps you guys had them all come on in Vineland.
How much of it is that is now online do you have any plans to expand that further today and then to further grow that wholesale opportunity within the market do you need more stores to open or is there more wholesale opportunities within the existing stores. I know you know a lot of them are vertically integrated today. Thank you.
Sure. This is David in New Jersey.
Sort of into the phase one of the build out of that second location in vineland.
Easily turn on incremental canopy as the market matures and so we're we're very we're being very focused on looking at the outlook for incremental third party doors to open I think everybody's eagerly waiting for that to come on board in the first half of next year or so.
Yes.
There continues to be incremental opportunity with the existing players in the marketplace.
For sure just given the organic growth in the New Jersey adult use program, but I think theres a theres a next level of incremental foot traffic that's going to come on line as doors open you see that basically in any market, particularly one that's our new adult use market. So I think everybody is focused on that incremental door opening event in Q1 and Q2.
<unk> of next year and.
Building on shelf recognition for your brands is going to be key for any anybody who wants to be a real wholesaler in the state of the state of New Jersey, So hyper hyper focused on it but we have the outlook for the 2023, which obviously haven't provided yet, but we have the ability to flex into that into that footprint and we built it to be purpose driven so that we can quickly add canopy as we anticipate.
New stores coming online and we can see that ramp in the in the wholesale opportunity as well as our third location in the state.
Yes.
Okay, great. Thanks, so much for the color and I'll jump back into the queue.
Thank you one moment please.
Our next question comes from the line of Vivien <unk> of Cowen Your line is open.
Yeah.
Hi, Thanks, very much and good evening all.
Echoes Echo Aaron's comment, but the profitability improvement was certainly nice to see.
My quick question is on Virginia, you guys have been really clear about what next steps are.
Some of the store openings, but I am just curious whether the outcome of the ballot initiatives in Maryland.
Pivoted your painting at all or is that something you guys were expecting and that was fully baked it into the hurricane your plan. Thanks.
So we're obviously very enthusiastic about the Maryland.
Maryland sort of outcome and we expected it.
It was one of those rare moments when you actually do have within the political outcome.
The voter will.
The Maryland, and Virginia, maybe next door to one another but they are very different in terms of market.
I think that what it does is it actually puts pressure on Virginia to follow through with its sort of long term plan and as we as we think about it.
Louis has been our expectation that Merrell would transition first we're well positioned in Maryland to take advantage of that transition, Maryland, and Virginia markets are extremely different just.
Just like DC is different in Maryland, but I think that.
As a regional player and the dominant player in the mid Atlantic It's very good because it set the tone for the competitive nature of the states and how they generate tax revenue. So we're cautiously optimistic that it actually sort of further as the sort of our long term agenda, we have in Virginia. It definitely supports the thesis for Maryland, and we think that it's.
The way it was handled whether it is done through legislative action.
Through voter referendums either either outcome is always a positive in the eyes of the markets that we're in but let me turn it over to David to see if he has any interviews.
The only thing I would add is Virginia, clearly is underserved from a door perspective, so we need we need all the existing operators to open open all the allowable doors because thats every time, we've opened the door even in our two regions from Richmond and below into the tissue, where we've seen incremental patient counts in the region. So I think that's certainly a tailwind heading into 2000.
'twenty three as we hopefully everybody, but we're certainly focused on getting the remaining doors opened so that's a positive tailwind for us in addition to the wholesale opportunity.
Certainly thank you for that color, that's really helpful and just pivoting to Pennsylvania, I think you and your peers have been really clear that yes.
Yes.
One sustained price deflation, but he was a byproduct of the fact that everyone.
One is expanding our cultivation footprint in anticipation of adult use to be sure under that the legacy paradigm.
It didn't seem really all that feasible.
The control of the State Assembly, just curious whether you're more optimistic on Pennsylvania, given <unk>. Thanks.
So I think that we are we continue to remain constructive on Pennsylvania, but it's not something where we're expecting any enormous changes in the very very near term.
What we're what we are seeing though is a lot of discipline coming into the market and a lot of rationalization coming into the market and some of those natural market dynamics are pressuring some of the some of the less sort of capable players in a way that benefits the more capable players and so if we had to sort of describe the our response to the Pennsylvania and the way too so really.
Take full advantage of the market opportunity there it's through the combination with <unk> right. So having having very very high scale high quality manufacturing and one of the best distribution channels proprietary distribution channels I think as it is at least the competitive equalizer if not an advantage.
And now that we that.
We're one step closer to that combination I think we will be able to realize that more effectively.
As it stands we still have construction ongoing it's ashton.
Columbia <unk> as a standalone business only has three dispensaries and Thats, a very tough place to be when you are under scaled in a competitive market.
It's not great. So.
Our future and our fate in Pennsylvania does not depend upon sort of a radical political outcome. If it happens it's asymmetric to the upside if it doesn't we still have something that no. One else has which is the benefits of this combination that's going to be very very near term and I think we will have a profound effect not only profitability but efficiency.
Perfect. Thanks, so much guys.
Thank you.
Like to ask a question. Please press star one on your touch tone telephone I just ask a question. Please press star one way.
Yeah.
Our next question comes from the line of Scott Fortune of Roth. Your line is open.
Hi, This is Nick on for Scott.
Looking for some more color on New York, you just rolled out the pre roll there wondering how you look at that kind of ahead of the closing with crisco and.
And then just kind of the recent news around maybe a pay to play structure imposed by the state for the Msos just kind of your sense on the regulatory side, there and how you think it will play out thank you.
So it's actually more unpredictable now than it had been even before the election cycle really ramped up and I say that because I think governor <unk> had a little bit of a scare in the sort of the sort of the runner up and thats. Good for us because what it means is that the state which has had a significant loss of business in.
In population is looking at the commercial opportunities within its own portfolio in cannabis is obviously one of those fairly substantial one of those so.
For us and for <unk> I mean, we certainly don't want to speak speak out of turn here, but we think that this is going to be one of the best growth markets in the world. We think it's one of the largest already one of the largest cannabis markets in the world and we think that the opportunity to combine forces and actually leverage one another best assets in that environment is going to be an enormous enormous benefit.
The addition of the Combs sort of organization is also incredibly powerful because one of the biggest criticisms that we receive in every market is that the industry doesn't have the sufficient diversity to justify the type of attention that wed like to have and so being able to sit down at the table with with the combs organization and their entire foot.
Print and not only in New York, but elsewhere I think added as an element of sophistication and an element of sort of very very direct.
Let's call it strategic decision, making that was partially.
In response to the demands of not only the policymakers, but also our regulators.
We heard what they were saying we heard what they wanted we wanted the same thing we were aligned that we found what we think is one of the best groups.
Potential candidates anywhere.
Sort of partner with these assets and we're very excited about it because it creates a very very different discussion and dynamic with with the regulators and with the policymakers. So.
There are a lot of different rumors that a lot of different structures floating around right now I think it would be disingenuous for me to say I know exactly what the state of New York is going to come up with but we're cautiously optimistic that whatever it is is in new York's best interest and what's in New York's best interest is in the best interest of the communities, we serve and therefore, our own interest. So we don't really have.
Sort of a disconnect in terms of the sort of the lens through which we see these opportunities. Although let me let me turn it over to David and see if he has anything to add.
The only thing I would add here is as we continue to to.
Worked through our location, our riverhead location on long island, and see improved quality not only in biomass, but also just in the quality of the material.
There is a marketing in New York that is that we introduced a pre rolls as an example at a lower price point there is velocity there so.
We remain cautiously optimistic about the future in the near term and in New York The timing I think is anybody's guess.
But we continue to be heads down in terms of our execution to be to be prepared for when incremental competition in new dispensary, social equity dispensaries come online. So that we can be one of the partners available to put our brands on the shelf.
Great. That's it for me I'll pass it on.
Thank you I'm showing no further questions at this time I'd like to turn the call back over to Nicholas Vito for any closing remarks.
Great. Thank you operator, well. Thank you everybody for your time today, we look forward to speaking with all of you in due course and feel free to reach out with any other questions have a great day.
Thank you ladies and gentlemen, this does conclude today's conference. Thank you all for participating you may now disconnect have a great day.
Okay.
The conference will begin shortly.
As Johan during Q&A, you can dial one one.
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