Q4 2022 Columbia Care Inc Earnings Call
Speaker 2: Good day and welcome to Columbia Cares fourth quarter and full year 2022 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. Instructions will be given at that time. As a reminder, this call may be recorded.
Speaker 2: I would now like to turn the call over to Leanne Evans, Senior Vice President of Capital Markets. You may begin.
Speaker 3: Thank you, operator. Good morning, and thank you for joining Columbia Care's fourth quarter and full year 2022 earnings conference call. With me today are Nicholas Bida, our chief executive officer, David Hart, our chief operating officer, Derek Watson, our chief financial officer, and Jesse Shannon, our chief growth officer.
Speaker 3: Earlier this morning, we issued a press release reporting our fourth quarter in full year 2022 results, which we will also file with applicable Canadian securities' regulatory authorities on the U.S. Security and Exchange Commission on that term.
Speaker 3: The top of this release is available on the Investors section of our corporate website, where you will also be able to access a Replace's call for up to 30 days.
Speaker 3: Please note that the remarks we make today regarding future expectations, plans, and prospects for the company, including statements relating to the Cresco Labs' transaction constitute forward-looking statements within the meaning of applicable Canadian and U.S. security 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.
Speaker 3: relied upon is representing our views as of any subsequent date. While we may update any such forward-looking statements in the future, we specifically disclaim any obligation 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 EBITDA and adjusted EBITDA. These measures do not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures.
Speaker 3: to Nicholas Bia to get us started. Nick?
Speaker 4: Thank you, Lee. Good morning, and thank you all for joining our call.
Speaker 4: It shouldn't surprise anyone to hear that 2022, in particular the fourth quarter, was a difficult operating environment due to economic headwinds.
Speaker 4: It was against that backdrop that we announced Columbia CARES merger with Creso Labs at the end of the first quarter
Speaker 4: To begin, let me start off by stating that the strategic merits underpinning the combination with CRESCO remain compelling and we continue moving forward on this path.
Speaker 4: The ongoing integration and market disposition process has been enlightening, informative, and exciting. However, even without the challenges of economic backdrop, the economic backdrop has been a challenge for many.
Speaker 4: Post-announcement, pre-closing M&A periods are exceptionally complicated and bring unique complexities that become more pronounced as time passes.
Speaker 4: To navigate this period successfully, we've done our best to balance the competing shareholder priorities of driving the business forward as an independent market leader while pursuing our combination with Cresco and partnership.
Speaker 4: Without constant attention, circumstances as fluid as this one, as the one we have been facing, can lead to organizational uncertainty and malaise.
Speaker 4: It's cited the long timelines, many of which are regulatory and beyond our control. Our team has remained decisive and focused on our efforts over the past 12 months on making Columbia care more efficient, more focused, and better prepared to succeed financially, operationally and culturally.
Speaker 4: We never stop pushing ourselves, and as a result, even though we have never faced such a challenging culmination of cross-currents over such a prolonged period of time, we've never looked out at the horizon and seen so much untapped opportunity and promise embedded in our organization and our markets.
Speaker 4: If through this complex period that our cultural North Star has made all the difference, we double down on our organizational values by rooting our turtle discourse and communications in our foundational belief that our people and the communities we serve are at the heart of everything we do.
Speaker 4: In the face of atypically public strategic and regulatory processes and an exceptionally long integration timeline, 12 months and still going, Columbia Care maintained the continuity of its leadership team. We worked collaboratively with the brand partners to ensure seamless transitions. It took steps to improve the quality of our service and products to benefit our guests.
Speaker 4: and we've balanced the M&A priorities and processes.
Speaker 4: against the need to continue building a better Columbia care. Living up to those competing priorities required extraordinary professionalism, thoughtfulness and dedication from our entire organization.
Speaker 4: To every one of my colleagues, I'm immensely proud of how you managed every aspect of our business and never lost sight of what matters most to us. To deliver our community promise and improve the business to drive shareholder value. Thank you all.
Speaker 4: As you can tell, especially in light of the macroeconomic and industry-wide challenges that seem to have peaked in 4Q, I'm proud that we achieved record-popping revenue and improved our adjusted gross profit and adjusted EBITDA March in over 2021. We continue to press our scale and sustainable advantages by opening new stores in strategic markets like Virginia.
Speaker 4: On a parallel path and in recognition of the contently evolving cannabis landscape, we've also continued to expand our award-winning cannabis retail footprint as more adult use consumers and regulators expand our markets for medical to include adult use.
Speaker 4: We continue to innovate and to perfect our national product offering by launching new brand architectures such as Heide-Edivils and Crest 2.0 cannabis tablets, as well as developing new SKUs and informed factors that speak for customers and patients.
Speaker 4: With a leading presence in so many markets, we are standardizing our baseline product offerings in each market. They're by enhancing our competitiveness in both the wholesale and retail settings.
Speaker 4: We continue to leverage our unique approach to implementing novel customer engagement and retention technologies with a launch of our stash-cash loyalty app in Q4 2022, which provides us with insight into customer behaviors and preferences, especially when combined with the use of our proprietary cannabis discovery tool forage.
Speaker 4: Knowing more about our end consumer has been invaluable and will continue to be a significant competitive advantage, particularly in an environment where retail is driving consumer and corporate behavior more than ever.
Speaker 4: In a period where our team and partners were facing potentially significant change, we've used this moment to reexamine and reassess the strengths and weaknesses of our internal organization. We listened to our investors and coupled that feedback with our own organizational assessments and aspirations to stride cash flow, and we initiated a line by line market made our review of the business to find every opportunity.
Speaker 4: opportunities ahead and in the process have reduced the burden of underperforming functional areas and operations. Simply said, with an unwavering commitment to invest in our business and to drive growth and profitability, we made decisions to materially lean in the things that work and reduce exposure to the things that don't. In doing so, we expect to generate approximately $35 million in annual savings from our existing costs.
Speaker 4: on 16 markets across the U.S., including high growth rate, high growth markets on the East Coast. With the first phase of the restructuring complete, we now look forward to realizing the benefits of these changes. In addition to exiting unprofitable markets as part of the recent corporate restructuring, we also closed several unprofitable retail locations and consolidated cultivation operations.
Speaker 4: in several material markets, including Colorado, California, and Pennsylvania.
Speaker 4: Today, we have 83 active retail locations and more than 2 million square feet of cultivation of production capacity. As we look ahead, we have...
Speaker 4: The completion of the GLEF integration beginning on July 1st, and in the meantime, our goal is to announce creative partnerships and strategies to utilize every square foot of cultivation and manufacturing space as we turn our focus to improving our gross margin as it means to leverage the improvements we have already implemented to reduce our S.G.A. and drive EBITDA margin improvements. These reductions in our operating and overhead costs are just the...
Speaker 4: beginning to flow through our financial results and aren't expected to show a full course benefit until the end of 2Q. In spite of the complications that come with having sticks of our markets involved in the divesture process related to the cross-go transaction,
Speaker 4: All of which are regulatory, for subject to regulatory approval, we closed in 2022 with over $511 million in revenue, an 11% increase over 2021, and drove at 16.5% year-over-year increase in Adjust the EBITDA.
Speaker 4: Considering the significant and unrelenting inflationary pressures on our consumer wallets combined with industry-wide wholesale pricing weakness in the second half of 2022, we were pleased for this outcome. But if taking materials steps to accelerate these trend lines, business will perform better in 2023 than it did in 2022. And we have a clear roadmap on what to focus on next to drive shareholder value.
Speaker 4: In addition to optimizing our portfolio to focus on markets where we have sustainable strategic advantages and scale, and to improve our operating efficiency and profitability, we've also taken steps to manage our liquidity, allowing us to leverage our balance sheet as effectively as possible. As we announced yesterday, we exercised our option to extend the maturity of our 13% senior secured notes by 12 months to May 2024.
Speaker 4: This costless extension enhances our overall liquidity position, eliminates any near-term debt maturities, or the need to redirect resources to repay and debtiveness, and provides us with a significant runway to build cash as our cost reductions in working capital initiatives take root. We are monetizing our working capital. We have no significant cap-backs needs to satisfy our growth aspirations, and we have no no material debt maturities until May 2024.
Speaker 4: In short, we are confident in our liquidity position. Moreover, we are confident that we have the tools and resources needed to drive the business and achieve our goals for 2023 without needing to access the capital markets on unattractive terms. Derek will provide more detail on the financial results from the fourth quarter, as well as some insight into what we're seeing thus far in 2023 shortly.
Speaker 4: With that, let's turn our discussion to look forward at what lies ahead for Columbia Care.
Speaker 4: We now believe that more than ever, Columbia cares the best pays our head of us. The company is well positioned with strong, sustainable, differentiated advantages. The footprint and asset base that we built in preparation for this moment is prime for the environment we're facing as well as the years ahead. First, we have the best embedded in-clap best.
Speaker 4: We have embedded best in class growth potential. We have leadership and scale in the most attractive growth markets like New Jersey, Virginia, West Virginia, where we have fully built out our cultivation and manufacturing capacity. Capabilities.
Speaker 4: We still have additional dispensaries to build as the market grows. In addition, we have significant call optionality in the next round of markets to set to convert to adult use such as Maryland, the summer, New York, and eventually state like Ohio, Delaware, and Pennsylvania. Second, we have limited capital needs to execute on our plan as we have completed the vast majority of the cab X required for every market.
Speaker 4: with the ability to operationalize and scale up our cultivation and manufacturing capacity when warranted.
Speaker 4: We've already built the infrastructure we need to be scaled in the markets where we will see growth. Now we will execute.
Speaker 4: With CAPEX behind us, we expect to see an improvement in gross margin in the long term, as we focus on leveraging our leading retail channel and up tap on tap wholesale opportunities.
Speaker 4: Margin in the long term as we focus on leveraging our leading retail channel and up on tap wholesale opportunities. Third.
Speaker 4: We have the right positioning for these market conditions with 83 active locations and 11 in development.
Speaker 4: The one largest retail network in the industry. This provides us with the ability to maintain margin and leverage wholesale relationships more effectively while offering retail stores that are positioned in the right local markets, isolated away from border market conversions in states like Pennsylvania and Illinois. And fourth, we continue to leverage technology to make our business better. We are innovators at our core.
Speaker 4: and are utilizing technology and data to improve every aspect of our business. From customer-facing innovations like cash, cash, and forage, standardized systems in our cultivation operations such as in Colorado, where we have reduced headcount, improved automation, and now garner better data and insights to improve production and quality.
Speaker 4: With that background, I'd like to take a moment to share why I have such confidence in our ability to capitalize on our unique position. First, we will accelerate growth by opening the remaining dispensaries in Virginia, West Virginia, New Jersey, and Maryland. Our cultivation and manufacturing is already scalable to capture wholesale opportunities, and we have expanded the capabilities in every market to produce concentrates, edibles, and higher-margin branded products that our customers and patients want.
Speaker 4: Every wholesaler needs access to recent retailers.
Speaker 4: We can provide that access and intend to do so in an equitable manner that allows us to sell our proposed suite of products and brands into other retailers, in order to develop brand leadership positions around the country over time. Second, we have implemented 60% of our restructuring line with remaining cost reductions in operational synergies coming later this year.
Speaker 4: This gives us line of sight on EBITDA margin improvement and lays the foundation for the next phase of our plan to drive cash flow. Recapturing gross margin points over the next 24 months by leveraging the scale of our cultivation and manufacturing assets around the country. Third, we believe we have the potential to drive adjusted EBITDA margin higher in the midterm as the business operates with the new cost structure.
Speaker 4: There is additional opportunity for improvement upon further optimization of cultivation. This includes utilizing available square footage, launching improved products, brands and SKUs into the wholesale market and leveraging our expanding retail channel, as well as implementing better systems to improve quality and reduce the absorbed costs on every gram sold.
Speaker 4: And fourth, we have retained a talented professional team that operates with integrity and is passionate about the opportunities that lay ahead in cannabis at Columbia Care. The leadership team has taken the past 12 months to review and assess every aspect of our business. In spite of the headwinds, our market continues to grow. My enthusiasm.
Speaker 4: is a reflection of the entire team's perspective. As we pursue a pathway to a transit action with Cresco, we look forward to executing on a potential and delivering the most attractive platform in the sector to all of our partners and investors. Columbia cares uniquely positioned with a meta-best in-class growth, the right positioning for our market conditions, and high potential for margin improvement. We are excited for the road ahead and the opportunity to build substantial shareholder value.
Speaker 4: With that, I will turn over to the call of the Derek, your financial results, and I'll look in more detail. Derek.
Speaker 5: Thank you, Nick, and good morning, everyone. I'll provide a summary of the key financial results for the fourth quarter and the full year of 2022, discuss the key trends we're seeing in our markets, and comment on the pending Cresco transaction.
Speaker 5: For the four year we achieved a record 512 million in revenue representing growth of 11% over 2021.
Speaker 5: Revenue in the fourth quarter was 126 million, a decrease of 5% sequentially versus Q3.
Speaker 5: The decline over Q3 was driven almost entirely by wholesale pricing in a challenged environment that all MSOs exposed to wholesale have been experiencing recently.
Speaker 5: Our retail revenue was flat quarter over quarter, despite continued pricing and discounting pressures in certain markets and reflected another quarter of solid retail transaction growth.
Speaker 5: In the fourth quarter we added a net one new retail store with two new store openings in Virginia and one closure in Colorado was part of our broader restructuring efforts.
Speaker 5: More about that in a moment.
Speaker 5: In Q4, our retail revenue was flat sequentially, while wholesale revenue declined 30% sequentially and represented just 12% of total revenue in the quarter.
Speaker 5: Average basket size, which is a combined measure of pricing, discounts, and share of wallet from customers at our retail stores, decreased quarter over quarter, but at a slower rate than we experienced in Q3.
Speaker 5: As we've talked about before, 2022 was a challenging year for consumer spending, with pricing down in a number of key markets and inflationary pressures resulting in a lower share of wallet available to spend in cannabis stores.
Speaker 5: The industry continued to grow in 2022, but at a slower pace than anticipated at the beginning of the year. Despite that, the long-term fundamentals of the industry remain strong.
Speaker 5: Once again, we saw continued growth in our emerging markets, like New Jersey and Virginia, with Virginia now joining Colorado as one of our markets, contributing over 10% of revenue during the year.
Speaker 5: Pennsylvania, California, Colorado, continue to be challenged and declined against the quenchally, but we've started to see stabilization.
Speaker 5: Adjusted gross profit for the fourth quarter decreased sequentially to 47.2 million down from 56.9 million in Q3, resulting in an adjusted gross margin of 37.4% also down from Q3.
Speaker 5: Our Q4 gross margin was impacted by lower pricing, particularly in wholesale, and also due to unfavorable absorption at underutilized cultivation sites that require us to expense cultivation overhead costs rather than capitalizing them into inventory. For the full year our gross margin was 39.3% with an adjusted gross margin of 4.0%
Speaker 5: while these assets are underutilized.
Speaker 5: Adjusted EBITDA for 2022 was 67.4 million, bringing our full year adjusted EBITDA margin to 13% and up 60 basis points from 2021.
Speaker 5: Adjusted EBITDA was 17.4 million in the fourth quarter, or 14% of revenue. Despite an adjusted gross margin decline in the quarter of 5.5 percentage points, EBITDA was only down 2 percentage points, as our restructuring initiatives continued to lower in revenue beginning June 1st at the Neal Athletic Center.
Speaker 5: To expand on the topic of restructuring, we took early and meaningful steps throughout 2022 with three separate rounds of initiatives.
Speaker 5: Our latest cost saving initiative announced in early January reduced or exited cultivation operations in six of our markets, closed four unprofitable retail stores in Colorado and California and eliminated approximately 25% of our corporate overhead positions.
Speaker 5: This latest initiative is anticipated to generate a net $35 million in annualized savings alone. Let's move on to our liquidity.
Speaker 5: We ended the year with more than $48 million in cash, having burned less than $2 million in the fourth quarter, a result of cost savings, lower capex, and improved working capital management.
Speaker 5: Capital expenditures in the fourth quarter are approximately 3.4 million, down from 11.9 million in the third quarter. For the full year, CapEx was 73.8 million.
Speaker 5: During the fourth quarter, we generated 5.2 million in positive cash flow from operations.
Speaker 5: A number of other liquidity initiatives are also worth noting. As we announced yesterday, we have extended the maturity on all 38.2 million of our 13% notes, which are now due in May of 2024.
Speaker 5: This extension was done under the existing indenture agreement and did not require consent or fees.
Speaker 5: There are no additional maturities in the short term until December 2023, when less than 6 million of our convertible notes become due. As a reminder, we also have capacity for our existing indentures that would allow for additional senior secured financing should we need it.
Speaker 5: During 2022, and as disclosed in our 10K filing, we reduced our overall cost of capital on our senior and commercial debt positions in a year when interest rates were rising.
Speaker 5: In 2022, we also negotiated a lower interest rate on any future capital lease needs and reduced the financial ease obligations disclosed on our balance sheet by over $18 million.
Speaker 5: We have not taken on any significant liabilities since announcing the Cresco transaction.
Speaker 5: In summary, we took early and meaningful actions to strengthen our balance sheet and make operating adjustments necessary in the current environment. This has created a clear path to positive free cash flow, building on the positive operating cash flow we achieved during Q4. So far in 2023 we've taken further steps to strengthen our balance sheet and make operating adjustments necessary to strengthen our balance sheet.
Speaker 5: paid on signing of the agreement in March.
Speaker 5: As we're well into the first quarter of 2023, we can say we expect the revenue to be slightly down sequentially from Q4, which is consistent with normal seasonality and would represent low single-digit growth when compared to the first quarter of 2022.
Speaker 5: We're maintaining our focus on cross-management discipline, preserving cash and deploying capital efficiently. In Q4, the majority of CAPEX supported store openings and cultivation projects and growth markets and will continue spending on similar priorities in 2023 to support continued growth.
Speaker 5: As we've mentioned and as you heard on the Cresco earnings call, we continue to support Cresco as we move towards closing of the transaction and we look forward to the growth that Columbia Care's portfolio will bring to the combined company.
Speaker 5: Despite the delayed timing of the Cresco transaction, and as you per today, we've independently taken actions to make Columbia care stronger and will continue to execute on initiatives to strengthen our business through closing.
Speaker 6: With that, let me turn the call over to David to cover operational highlights. David. Thank you, Derek. I will now highlight important operational developments during the fourth quarter, particularly in our top markets. On a revenue basis, our top five markets alphabetically were California, Colorado, New Jersey, Ohio, and Virginia. As we begin, the technical development of the project and ray of law, see, philosophy and reserve as well.
Speaker 6: On an adjusted EBITDA basis, our top five markets were Massachusetts, New Jersey, Ohio, Pennsylvania, and Virginia, with Massachusetts replacing Colorado since Q3.
Speaker 6: I want to highlight that New Jersey and Virginia both remained in the top five this quarter, further demonstrating the strength of our emerging markets.
Speaker 6: As Nick mentioned in Q4, we leaned into cash preservation and inventory management.
Speaker 6: which negatively impacted gross margin in the quarter. In cultivation, we remain focused on increasing quality and potency while lowering our production costs per pound. During the quarter, we continue to optimize production planning, genetic selection, environmental controls, and plant management across the portfolio.
Speaker 6: A number of our markets are seeing improved potency THC percentages through strict adherence to SOPs, and have identified numerous high potency strains of 26% THC or greater. We currently have over 68 high potency strains in our library, with plans to increase our genetic diversity in the coming months. On the manufacturing side, we are ramping the production of concentrates in the portfolio.
Speaker 6: and launched heady edibles in the beginning of Q4, followed by our cannabis tablets under Press 2.0. We continue to expand SKU and product offerings in each of our markets as we meet customer and patient trends.
Speaker 6: Now to discuss a few markets in more detail. In California, we close our downtown LA dispensary and cultivation site in January as part of our efforts to optimize our portfolio as pricing pressure has stabilized but nevertheless
Speaker 6: In Colorado, we took down a significant amount of canopy and closed one store during the quarter. We saw a sequential decline in sales as compared to Q3 due to competitive pricing, lower average dispensary sales and decreased transactions. Colorado was the focus of restructuring efforts during the first quarter of 2023.
Speaker 6: where we have continued to drive efficiency and cut costs by beginning to wind down several cultivation sites. We've closed the total four retail locations in the state yet still remain a leading market position with 23 active dispensaries.
Speaker 6: Turning to Massachusetts, where we saw a sequential improvement in gross margin as we continued to optimize automation and streamline processes throughout our manufacturing facility.
Speaker 6: We launch numerous SKUs in 2022, including Rollier-Rone, pre-Rollkiss, triple-7, and Seed and Strain popcorn and press 2.0. The market continues to see wholesale pricing pressure, mainly in the flower category.
Speaker 6: In New Jersey, revenue was up 150% in the second half of 2022 due to ramping adult use sales and strong wholesale opportunity. Our cannabis locations in Defert and Vineland were some of our top retail locations in our portfolio in the second half of 2022.
Speaker 6: During the quarter, we introduced multiple SKUs, brands, product line extensions, and flavors, including applicators, and amber hash.
Speaker 6: We achieved automation for flower and pre-rolls that are second cultivation site in the state, which helps streamline production to meet strong demand for the adult use market.
Speaker 6: In Ohio, we saw an increase in internal deliveries to our own stores, which led to a significant expansion of shelf space.
Speaker 6: providing us a platform to reintroduce genetics and overall quality to the market with increasing competition. A 50% garden canopy reduction late in the fourth quarter helped to mitigate an overabundance of finished products. We also introduced strain-specific CO2 carts and RSO duplicators under seed and strain brands during the quarter, which provided more product diversity and allowed us to increase internal sales year over year.
Speaker 6: Your operators are set to open through 2023, which we expect will lead to an increase in wholesale opportunities for production as well as an increase in competition for our retail portfolio. We remain optimistic that our introduction of high quality products in the market will position us well as competition from the retail front intensifies.
Speaker 6: Turning to Pennsylvania revenue is down sequentially due to lagging wholesale demand, but we saw an increase in adjusted even margin as we skewed toward retail. 1 of the biggest changes to canopy capacity as part of our January restructuring initiative was the reduction of canopy and the 270,000 square foot facility in section Pennsylvania. We retain optionality to scale up when marketing conditions warrant.
Speaker 6: Finally, turning to Virginia, which continues to be a top market for Columbia Care. During the fourth quarter, we opened two new Canvas locations in Richmond and Williamsburg. Virginia expansion has continued in 2023 with two additional openings thus far. We have eight retail locations open to date with four more in development. Revenue in Virginia has increased nearly 100% year over year.
Speaker 6: We're still seeing double digit growth on a quarterly basis as the medical program continues to expand.
Speaker 6: In a state with more than 8.5 million people, there are currently just 55,000 patients registered in the state or about 0.6% of the population.
Speaker 6: We're seeing that number increase as the program has become one of the most accessible medical programs in the country. There's significant room to grow the patient population and we look forward to serving them as we add additional retail locations in the Commonwealth.
Speaker 6: In closing, I'm pleased with the progress that our team has made in all of 2022. We've carried our momentum into 2023 with 3 new store openings so far and are determined to ensure we are well positioned in growth markets with a strong retail footprint.
Speaker 6: We will be ready to hit the ground running as adult use comes online in more states like Maryland in the future.
Speaker 6: I will now turn the call back to Nick and we will take your questions. Nick. Thank you, David. We look forward to taking your questions. Operator, can you please open the line?
Speaker 2: Thank you. If you'd like to ask a question, please press star 11. If your question has been answered and you'd like to remove yourself in the queue, please press star 11 again. One moment while we compile the Q&A roster.
Speaker 2: And our first question comes from Erin Gray with a line of global partners. Your line is open.
Speaker 7: Good morning and thank you for the questions. So first question for me. Good morning. Good morning. I just want to dive a little bit into the margin during the quarter. Could you quantify maybe how much of a drag there were from some of the markets that you've exited some of the retail cultivation like like California, Colorado, Pennsylvania during the queue?
Speaker 7: and mostly just trying to better conceptualize how we think about margin improvement in the near term that you kind of spoke to and how much color we might expect as you kind of shift in and capitalize on some of those things you mentioned. Thanks. Why don't I start off with a very high level sort of comment and then I'll turn it over to David and Derek to sort of fill in the gaps.
Speaker 4: Obviously, what we suggested is that the totality of the restructuring today culminates in about $35 million in a reduction of overall op-ex. That ought to flow to the bottom line. Part of those changes in op-ex related to reduction in canopy. We still have the same footprint. We still want to preserve the...
Speaker 4: that has to flow through from gross profit. So although you see a sort of a significant improvement in SG&A, the percentage of revenue, you'll also see sort of an offset in the form of the absorption accounting that gets spread out through our gross margin. Now we're focused on gross margin now that we're sort of wrapping up the SG&A piece of the restructuring puzzle.
Speaker 4: And so we feel confident that there's a very, very clear path to help us get there. The net outcome should be positive. But if you want to sort of, let's say, if you want to isolate Missouri, like we were losing about a million dollars a year in EBITDA in Missouri. And so that obviously reverses and it's also a source of liquidity for us, which is two good things that are-
Speaker 4: So I don't know, Derek and David, if you have anything to add to that or if you can provide some additional sort of specifics to help Aaron. Yep. Thank you, Nick and hi Aaron.
Speaker 5: So as you pointed out, there was a certainly a significant impact on gross margin in Q4 as a result of the restructuring and as a result of the cultivation take down. Our adjusted gross margin in Q3 at 42.8% going down to 37.4% in Q4 is a reflection of that. So that's about 5.5 percentage points.
Speaker 5: we don't treat the under-absorption of cultivation sites as an adjusted EBITDA adback that just flows through cost of goods sold, as Nick said, as part of absorption costing. So in the short term, let's say that five and a half percentage point swing is something that we'll be experiencing until, as Nick says, we bring that cultivation back online.
Speaker 5: and we're past this restructuring that we've initiated in Q4.
Speaker 7: Okay, great. Thanks very much for that color.
Speaker 7: And the second question for me is I want to speak a little bit on Virginia. I know it's a strong medical market for you guys right now, but with adult use regs stalled, can you speak to how you now approach the market in terms of investments? You mentioned continued building out the full allotment of retail, so more so on the cultivation side, and how you look to approach the market with more uncertainty in terms of when adult use might come and the insight you might have in terms of the prospects of adult use and what might come online for the re...
Speaker 4: operating in that environment. You have a very large total addressable market and you've got a state that's basically opened up the medical market as wide as it possibly can. So we built out our infrastructure and we continue to build out our infrastructure because there is substantial unmet demand throughout the state in all of our areas.
Speaker 4: The manufacturing cultivation piece is something that was already scaled. So if we have to, if the regulations sort of surface to transition to adult use, that's not something that's going to require us to, it's not going to require a lot of time or money for us to convert our operations because we'll already be ready for that transition point.
Speaker 4: But in the meantime, what we see is frankly, even you can use Pennsylvania as an example, you see a very, very reasonable framework for the medical market that is growing at an enormously fast clip. And we're basically poised to take advantage of that growth. And it's been a very good market for us and it will continue to be a very good market for us.
Speaker 4: Whether or not we have adult use regs surface in the next, let's call it, six to twelve months, I don't know. But our model and our expectations aren't built on that because we always knew that there was a legislative change that was required to move that path forward. So, you know, think about if you had a state the size of Illinois, but you have four operators.
Speaker 4: for all intensive purposes. That's kind of the market opportunity set for us in the state of Virginia. And we're very excited about that. So, I think heads we win, tails we win, and that's one of those few moments of in time when you can really say that with a great deal of confidence. I think that there is pressure to continue moving towards adult use, but at the same time, there's also pressure to continue.
Speaker 4: expanding the medical program and making sure that access is there and unfettered access more importantly is available to anybody who needs who needs to be a participant in the program. But David, maybe you can add some color.
Speaker 6: Yeah, the only thing I would add is we've, we've continued to be focused on building out the retail footprint. We, we have. And deliberate in attempting to find viable locations, not only for the medical program, but that we think will be ideally positioned for for an adult use framework as well. So that is that is why we still have several several facilities in final stages of being.
Speaker 6: identified and built out. So that will occur in 2023. And as Nick mentioned on the manufacturing and cultivation side, we have 2 locations, both of which have been essentially fully built out and are operational. So. The team on the ground on a day to day basis continues to see organic growth every time we open a new door from Richmond down to the southern border and out to the East Coast.
Speaker 6: And so we continue to benefit from the organic growth opportunities of just providing incremental doors for access for patients. And the team is hyper focused on canopy, THC level increases and genetic diversity and concentrate brain launches commensurate with other states. So it's.
no change to the operational plan in Virginia over the last 18 months or so. We'll continue to execute until the adult youth framework comes our way, of which we'll be well positioned for.
Okay, great. Thanks so much for the call and I'll jump back to the queue.
Thank you. Our next question comes from Scott Fortune with Ross MKM. Your line is open.
Our next question comes from Scott Fortune with Ross MKM. Your line is open. I got it.
Maybe a mute. Operator, maybe we should come back to Scott and go to the next question. Can you not hear him? I can hear him. You can't hear him. Okay, one moment.
Scott, your line is open.
It's got your line to open. Can you hear me now?
How are you? We hear you great. Thank you. Sorry about that. I don't know what that happened there, but real quick just wanted to provide a little bit more update. Obviously the wholesale size week versus retail side. How do you see the mix going forward here with the verticality? Are you kind of fully stretched out?
opportunity and that mix going forward as you see that starting to improve.
So let me turn that over to David, but before I do, I think that the, in terms of the infrastructure, just the raw infrastructure to participate in the wholesale market and the retail market, we feel very good about the capex we spent sort of over the past several years, and we're well positioned to take advantage of that. Our, our
Obviously, with the merger on the horizon, it's changed, it's forced us to see the world through a very different lens because we haven't had sort of the decisions we're making are decisions in collaboration with CRESCO. But what I can tell you is that knowing that we don't have a defined timeline, based on the regulatory
Elements of the of the approval process what I can tell you the following on a steady state basis for Columbia care, you know, as as just a unique independent entity. Um, the way we approached the restructuring our own restructuring was the 1st, get our in line with where we thought it should be, which I think we're getting close to. Now that we've done that, we're going to get we've we've also at the same time.
run a parallel path to improve our quality of manufacturing and cultivation and actually introducing products that give us the full suite of skews that we really need to be competitive in each market. With that sort of combination and knowing that we're leaning into a number of markets where we do have leadership like New Jersey, like Virginia, it allows us to really horse trade more effectively and participate in the wholesale markets to a much larger degree. And so historically we've always under
Indexed in the wholesale market, I think what you'll see is that we intend to move that indexing north. But because we have a retail orientation, you're always going to see us sort of expanding not only into our new facilities, but maintaining share. And obviously we're seeing increased foot traffic coming through our dispensaries. And all of that helps us from a brand building and from a margin perspective. So it's, you know, I think a rising tide raise, you know, sort of rises lifts all.
been heading into 2023 at Highlight Seven States where there is wholesale opportunity for us that's organic in terms of growth prospects. Colorado is pricing dependent. We obviously took some restructuring initiatives in Colorado and I focus on putting own product on our on our shelves in 2023. Depending on the pricing environment, we always have the opportunity to actually lean into the wholesale market if it makes sense from a revenue and a margin perspective that the priority is.
exclusive drops and that has had a pronounced impact on our opportunity and we go to Mark Patrategi and Illinois. In New Jersey, as Nick mentioned, there are a number of new doors opening. We've established relationships with over 70 new doors that are opening in New Jersey. And so we're in constant dialogue about day opening and initial inventory asks. And so we're hyper focused on capturing that new incremental work of chair in New Jersey. In New York, we've launched a number of new programs.
And then lastly, West Virginia, new doors are opening and we are essentially the axe in the wholesale market in West Virginia in 2022. We will be in 2023. And one we probably don't spend enough time on but we're clearly excited about is Maryland going adult use probably in July .
There's going to be an incremental opportunity, I think we're well positioned there from a flower and concentric perspective. So, as Nick mentioned, it's been a relatively low percentage of our total business because of the expansive retail footprint that we've had historically, but we do see the opportunity to begin to lean into the wholesale market opportunities in a number of states where flower quality, THC profile, genetic expression, and concentric
reduction, primarily going to adding new stores, Virginia and such that you mentioned. But how are you looking at the Maryland market and the confidence that they'll start here as in mid this year and the kind of opportunities in the Maryland market? Obviously, we've seen pricing come off there, but we see stabilization of pricing in the Maryland market.
So, just a couple of very high level thoughts. I mean, I think Maryland for us, we're looking at it both from a retail and a wholesale perspective, because we still have that PG County dispensary that we'd like to develop. That were that were we're pursuing the site for right now. And, you know, I think we're cautiously optimistic that. The way the regs shake out will be a net positive for all operators.
The fact is you're going to see a fairly substantial expansion of the Maryland opportunity. We've seen some price declines over the past. What's called several quarters in Maryland and that's made it somewhat challenging. But our infrastructure there is very well suited for a conversion point, which is kind of where we are right now. And we would expect that the participation in the whole same market that we've seen is coming to the next day because we made a technique. The Ramon
operated by the G-LEAF team, but we've recently completed the build of a manufacturing facility, which is essentially adjacent to our cultivation facility. So we've consolidated the back of house, if you will, into one region in Maryland and gained some incremental scale on the manufacturing side. So I think we're well positioned for adult use and as a company, we've been through a number of these transitions and conversions. So I think we're well prepared for it and looking forward to it. Thank you.
I appreciate the detail and congrats on extending the debt from there. I will jump back to you. Thank you. Our next question comes from Glenn Mattson with Leidenberg-Dalman. Your line is open. Yeah, hi, thanks for taking the question. Just a quick first on the model, just I think Nick at one point talked about extending the debt maturity allows you guys an opportunity to rebuild the cash position. So I guess.
You're implying inherently that you'll be free cash flow positive for the year. I'm just kind of curious of some of the components of that. Would you expect like working capital reduction would be as part as maybe you know on the inventory side in particular and then just more specifically on what the CapEx expectations for this year? So let me turn that over to Derek. I think he's probably best position to answer that.
So on the working capital side, with cultivation coming offline, we have the opportunity to reduce inventory with the overall industry not growing as much as we anticipate. So yes, there's an opportunity to reduce inventory and free up working capital from that perspective.
The CAPEX initiatives that we've talked about, certainly in the last two years, we've built strong and early. So the CAPEX focus for 2023 will continue to be at a lower level, while still supporting some of the manufacturing process build-outs in our growth markets and obviously the store openings that we've got anticipated on the East Coast.
So that is the path to free cash flow positive for 2023. And as we've mentioned in Q4, we've already hit that operating cash flow positive position based on a number of initiatives that we've taken towards the end of the year.
The only thing I would add is that in the 1st quarter, you would expect to see some cash based charges because of the restrictions we went through. Those are obviously 1 time in nature, but that's just that would be the only kind of anomaly in the plan. I mean, I think.
I think when you look at the improvements, if you've just run out gross margin to kind of where it is right now, and you assume that we realize the benefits of SGNA that we're expecting you would anticipate EBITDAB is also a significant contributor to sort of that migration to free cash flow positive. Great, thanks.
I'm not sure if there's any color you can give us on the update on the divestiture process and relation to the merger and then maybe just on the timing of how it would work out say, you know, if you talk about a potential to queue close, although I don't know if that's something we're still sticking by at this point, but if it is, if you know how long would it take for you to like announce it and then for the review process to happen in order to
To meet that kind of a deadline. Look, I think I think Charlie said on the call the Cresco call, you know, there's a path to closing the transaction. We've we've we've sort of. Jointly agree to extend the outside date to the end of June . There is a significant interest in the assets that are that are up for sale.
to the downside. I don't think we're getting any credit for having a sort of a stronger business as we have. And I think that what I would like people to take away from this call is a very simple message, which is the business itself is very attractive. The business itself is doing everything that it should be doing and the team, you know, we've shown great continuity and that ought to be, you know, that ought to be a sort of a catalyst for looking at where we are from a stock perspective.
with Cresco. I'm just wondering, I know you can't get into any granular details on it, but are you able to provide any color as to where private sector valuations are relative to maybe your expectations when this deal was announced and just even the attractive nature of Florida and Ohio and some of these assets that are up for sale. What is the landscape looking like right now just with respect to the...
that.
So, I mean, I think the way I would let me break that into a couple of different components. There is no shortage of capital out there for the sector. I think there is a shortage of willingness to deploy that capital. A lot of the assets that we are selling right now have some pretty significant regulatory pathways that need to be understood in order to move forward. And that requires a lot of diligence. In New York, Ohio.
both of those markets could be dramatically different in 12 to 24 months. Just as examples. So we haven't seen a shortage of interest in getting into the sector. Frankly, I've been surprised at the upside at the number of parties that are not familiar with cannabis that have expressed interest in these assets because of the quality of them. But the timelines make it very difficult because you have to
and the public markets evaluation in the private sector, I think though that a lot of the euphoria, for first of all, a lot of the public sector investors that were in the sector that had cycled out, may have been looking for catalysts that didn't materialize. So for example, safe passing. And I think that was a real concern for people. And I think a lot of our competitors had done
done a lot to sort of build an expectation that that was a possibility. When that didn't materialize, right, that was a disappointment. And so you saw people flow out wondering when the next catalyst was going to come. But I think that the sort of the people that we're seeing now are much more fundamentally oriented. And they're not making their investment based on a catalyst. They're making investment based on status quo. And when you look at our business just as a microcosm for the rest of the sector, the amount of SG&A we've taken out of the...
the organization gives us a very clear path on margin improvement, EBITDA margin improvement. If we can even execute on half of the opportunities we see on the gross margin side, that flows through basically using the inverse margin as it flows through to EBITDA, that creates significant scale. Even with all the hiccups that you can't...
That's one of the things that contributed to all the noise that you're hearing in cannabis and the noise you felt through the capital markets. But does that mean that we're going to hit our expected target for valuations of the assets being sold?
I will tell it's impossible for me to answer that question until until we actually have the signed definitive agreements. But I'm encouraged by the fact that we have sort of agreements being negotiated. We have that are signed. We have. Parties that are very credible that are going through the process and very excited about the opportunities that. You know, an acquisition like that could mean to them.
Got it, appreciate that. And then just one more for me, just on New Jersey, I'm wondering, is there any dynamics that you can share with respect to future capex that's needed in that market? Call it in this year and maybe early 2024 in order to facilitate the growth profile that we've been seeing in that market or just to kind of jockey up positioning with where you guys are in branded sales or is it just more of a function of
And we've made significant capex, the cultivation and manufacturing side. There may be a few smaller things that we want to add here and there to sort of refine the portfolio and roll out additional concentrate lines or things in that sphere. But I think the biggest capex sort of piece would be...
Completing that 3rd dispensary and actually competing on a sort of apples to apples basis with others that have 3 dispensaries open. That would be very, very meaningful to us, but that's all upside. And so, you know, do we have the money for that? Yeah, we do. Do we do we have 2 sites in mind that we're looking at right now that are very serious? Yes. Has 1 of them have we begun?
sort of picks and shovels and throwing hammers around in one of them, yep we certainly have. And so we have, I think, the ability to accelerate that growth rate in New Jersey, but I'm, you know, I don't think there's anything fundamentally necessary for us to compete in the wholesale and the retail setting that is sort of missing from the puzzle at this point, but David and Derek made you guys can weigh in. You know, the thing I would add is the significant cap like investment required in New Jersey has been made by us. And so the increment.
So, continue to lean into it and we have the capacity and can lean into it when it's appropriate. We've purpose built those assets in New Jersey for a large adult use program.
Yeah, I agree. You know, these are one of those great examples where we invested early and heavily, and particularly with the acquisition of the second cultivation site. We've got excess space at that second cultivation site ready for further expansion if needed. And as Nick said, it's the additional dispensary that will be the key part of any spending in 2023.
Got it. Appreciate all those comments. Thank you. Our next question comes from Matt McKinley with Needham. Your line is open. Thank you. I have a few questions around the $35 million in annual savings. I think you noted that you don't expect to see the financials or that to show up in the financials until the end of the second quarter. So is the full year cost savings more like $17 million for the full year?
How much of the savings do you expect to see in COGS versus SG&A? And with what you noted on the overhead absorption, I assume that a portion of that 35 million in savings is just related to having less labor in a mothball production facility. But if you have this new offsetting absorption of fixed costs immediately that goes through COGS.
Is that $35 million run rate actually a $35 million run rate because you have this offset? Yeah, so let me unpack a few pieces of that and appreciate the question. So the $35 million is a net annualized savings and yes it was initiated in Q4 so some of those savings based on
canopy reductions and exit of the California DTLA sites, for example, are a full-year impact for 2023. There are additional canopy reductions that took place over time, so there's not a full-year impact, but all of the...
all the restructuring has been initiated and at this point has now been executed on. So we've got the full benefit of that starting in Q1 and for the balance of the year.
In terms of the overhead reduction, the SG&A reduction with 25% of our corporate overhead, corporate headcount I should say, that was also initiated in late 2022, early 2023, and those individuals have left the company, so we've also got the benefit of most of the year.
impact on those savings. So you'll start seeing that benefit in Q1 as well.
What was the rough split between Cards and G&A in terms of the savings? I'm not sure we've done that split, but we can...
We can come back to you if we need to on that. I think that the point you made about it being net savings, meaning that we factor that into our analysis.
to come up with this $35 million number. And the vast majority of it is headcount reductions through SG&A and basically the elimination of facilities or assets or operations that we're losing money. So, I think, Matt, if I'm not mistaken, the question you're asking is, is it really a $35 million or is it substantially less because of the offset? I think what you're hearing us say is that it's a $35 million number. We've thought through that piece.
What would be the big drivers that had improvement in working capital? Was that mostly deferred taxes or did you make progress reducing inventory which would likely be a little bit more sticky and and fail out more about your ability to generate cash from working capital in 23.
Yep, so Q4, as you're pointing out, we had a 5.2 million of operating positive cash flow in Q4. There's some of the working capital benefit that we already saw as a result of some of the restructuring initiatives. And we announced in mid January , but that was announcing at the end of the restructuring program.
So there are some inventory benefits that we'll see and working capital benefits that will impact you for, but it is an ongoing focus on liquidity and cash management that again we started in early 2022, given this was the third round of restructuring. So we're getting the benefit of multiple initiatives that are taking hold.
There are some inventory benefits that we'll see in working capital benefits that will impact you for, but it is an ongoing focus on liquidity and cash management that again we started in early 2022, given this was the third round of restructuring. So we're getting the benefit of multiple initiatives that are taking hold. We have our first tax hold change.
We're current on taxes. There's no deferral of taxes that you're going to see as a result of working capital. It's operationally focused. Okay, thank you. Thank you. There are no further questions. I'd like to turn the call back over to Nicholas Vida for closing remarks. Great. Well, thank you everybody for your time. I'm sure we'll be speaking with many of you throughout the day. If anyone has any follow up questions, please let us know. We want to make ourselves available and we'd love to.
to re-engage with you and tell you a little bit about all the great things you're having at Columbia Care. Thank you. Thank you.
I have you.