Q2 2023 Columbia Care Inc Earnings Call
Good morning, and thank you for standing by and welcome to the Columbia Care Second quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
Ask a question during this session you need to press Star one one on your telephone you will then hear an automated message advising you. Your hand is raised to withdraw your question. Please press star one again please.
Please be advised that today's conference is being recorded.
Now I'd like to hand, the conference over to your Speaker today, Lee Evans Senior Vice President of capital markets. Please go ahead.
Thank you operator, good morning, and thank you for joining Columbia Care's second quarter 2023 earnings Conference call.
Today, our Nicolas Peter our Chief Executive Officer, David <unk>, Our President and Chief Operating Officer, Kirk Watson, our Chief Financial Officer, and Jeff Buchanan, Our Chief commercial officer.
This morning, we issued a press release reporting our second quarter 2023 results, which we will also file with 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 constitute forward looking statements within the meaning of the 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 in the risk factors section of our annual Form 10-K for the year ended December 31, 2022, which has been filed as applicable regulatory authorities and also in 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 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 presented by other companies Columbia care considered certain non-GAAP measures pretty meaningful indicators of the performance of its 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 Nicholas B that to get us started.
Thank you Lee and good morning, everyone. Thank you for joining our call today.
We're excited to discuss the results of the second quarter and more importantly, the exceptional growth and profitability opportunities, we expect to capitalize on in the coming quarters and years.
Let's start with Q2.
As Eric will discuss in more detailed results of the most recent quarter demonstrate the continued progress we are making in executing our strategic growth plan in the midst of ongoing headwinds.
We also continue to streamline our operations drive efficiencies and further solidify our unique geographic footprint and the best markets to drive profitability and cash flow.
As a result, we recorded significant sequential improvements in gross margin adjusted EBITDA and <unk>.
Just the EBITDA margin, achieving a 24% sequential increase in adjusted EBITDA and a 260 basis point increase in adjusted EBITDA margin over the fourth first quarter.
We are hyper focused on achieving positive free cash flow and we're implementing numerous steps to consistently improve both our income statement and balance sheet, which you will hear more about in a few moments.
<unk> is uniquely positioned positioned in the cannabis industry, we are poised for significant growth, which I want to outline specifically.
First we are operating in emerging 80 billion industry that remains fragmented you had only a handful of companies are executing reasonably well in this space.
With the team the assets the capabilities in place to do so we intend to lead the industry as a next leg of development.
We are among the most diversified operators in terms of geography and asset base. We are also one of the most scaled in the markets that are still growing world.
We're poised to transition, namely on the East Coast Importantly, we're scaled in markets that are driving the most value now.
Not only do we have a presence in the top markets in the country, but also in many of the fastest growing markets, such as Maryland, New Jersey, and Virginia as well as those markets that will transition from medical to adult use next such as Delaware and New York.
Third we have an exceptional retail network supported by innovative technology standardized operating systems, a strong brand and loyal customers, we fully intend to further expand the cannabis brand across our entire retail network over time.
We've already invested the capital to build one of the best retail networks with 86 active locations across 16 markets. We expect low capital investment requirements going forward as we've nearly completed the capital investment cycle now we will sweat the assets.
Fourth.
We continue to improve our wholesale and manufacturing capabilities across our network, we manufacture at the highest quality products and innovative form factors and we build brands that consumers demand opportunities remain for us to have to.
Further drive efficiency across our network and pursue partnerships to drive wholesale growth, which both David and Jesse will elaborate on shortly finally.
As Derek will also touch upon we are undertaking multiple initiatives to strengthen our balance sheet reduce interest expense and achieve and maintain positive cash flow and profitability.
So relative to others in the industry is my expectation that we will show a higher growth rate vastly improved margin profile and stronger execution as we always relied upon technology innovation human capital and frankly hustle.
Over the past year and a half our management team is dissected every aspect of our business is laid out a three year course of action implemented significant changes and solidified our foundation for growth.
We were at an inflection point now.
With the coiled screen place to propel our growth and profitability. This team is committed in every way.
The success of the organization and we've realigned to ensure that we drive value for shareholders and bondholders, while we continue providing the best products and services to our Colombia, Karen cannabis community.
With that I will now turn over the call to Derek to review, our financial results and outlook in more detail Eric.
Thank you Nick and good morning, everyone.
I'll provide a summary of the key financial results for the second quarter discuss key trends in our markets and comment on the balance sheet management initiatives underway.
For the second quarter, we achieved $129 2 million in revenue, representing 4% sequential growth over Q1 and flat versus the second quarter of 2022.
Adjusted gross profit increased to $52 2 million, an increase of 9% sequentially over Q1, and a 5% decrease as compared to the same quarter in 2022.
Adjusted gross margin of 44% was approximately a two percentage point improvement over Q1.
Adjusted EBITDA was $20 3 million up 24% sequentially over Q1, and 69% year over year.
Our adjusted EBITDA margin was 15, 7% an improvement of 260 basis points over Q1.
Also of note our income statement will report a positive operating profit for the quarter.
During the second quarter, we opened one additional retail location in Norfolk, Virginia and have since opened an additional kind of dislocation in Suffolk, Virginia, bringing our store count to 86 as of today.
In Q2, despite continued price compression in a number of our markets. Our retail revenue increased four 5% sequentially driven primarily by volume growth in Maryland, New Jersey and Virginia.
Wholesale activity across the industry remains challenged in a wholesale revenue decreased slightly as compared with the first quarter to $15 2 million.
Wholesale is similarly impacted by industry price compression, but also by higher levels of <unk> as industry participants focused on increasing the percentage of owned brands in their own retail stores.
As we've highlighted previously due to the rationalization of certain cultivation assets and temporarily taking canopy offline. Our gross margin is impacted by unfavorable absorption underutilized sites that require us to expense overhead costs, rather than capitalizing them into inventory.
In Q2, this reduced our adjusted gross margin by approximately five percentage points to 44% we reported.
Our reduced canopy in certain markets will continue to generate net cash savings. However, it also has an unfavorable impact on gross margin until we turn canopy backhaul and utilization rates improve.
At the end of July we announced some incremental cost reduction initiatives, primarily from completing the integration of our <unk> acquisition.
Together with previously announced initiatives to close or reduce cultivation operations closed unprofitable retail stores and eliminate corporate positions. We are on track to generate a net $38 million in annualized savings.
On to our liquidity we.
We ended the second quarter with $37 million in cash representing an overall cash burn of $3 million in the quarter.
Gross capital expenditures were $1 7 million in the quarter supporting new store openings and some growth capex.
Cash flow from operations in the quarter was a negative $313000 annually.
As profitability continues to improve both from higher revenue and reduced costs, we expect to generate positive cash flow from operations in Q4 of this year, regardless of how the balance sheet or debt management initiatives were implementing.
In that regard our next debt maturity is in December 2023, when $5 6 million of convertible notes become due and which we expect to settle out of operating cash flow.
On July 31st we announced we have received commitments from number of holders of the 13% notes due in May 2024 to exchange into a nine 5% notes due in 2026.
We are still in ongoing conversations with additional holders and expect to close this limited exchange in the third quarter.
We have taken additional measures to strengthen our balance sheet and are pleased to announce two new mortgages that closed in early August grossing up $8 million.
This is in addition to the divestitures of assets in downtown Los Angeles, and the sale of our Missouri operations, both of which we previously announced.
Proceeds from these activities have been used to pay down approximately $10 million in debt, specifically seller notes and we will continue to targeted initiatives to delever, our balance sheet and reduce interest expense.
As you've heard on this call and in previous quarters, we have been taking a number of incremental steps to improve profitability increase operating cash flow and strengthen our balance sheet.
For the balance of 2023, we continue to focus on cost discipline, optimizing our asset base preserving cash and deploying capital efficiently.
With that let me turn the call over to David to share our operational achievements and his thoughts on our ongoing growth opportunities.
Yeah.
Thank you Derrick I'll now highlight important operational results and developments during the second quarter on.
Our revenue basis, our top five markets, alphabetically, where California, Colorado, New Jersey, Ohio, and Virginia Cal.
California replace Pennsylvania in Q2.
An adjusted EBITDA basis, our top five markets also alphabetically, where Maryland, New Jersey, Ohio, Pennsylvania, and Virginia unchanged from Q1.
New Jersey, and Virginia remain top markets with which continues to demonstrate the strength of our emerging markets.
During the quarter, we continued to realize the benefits from our cost saving measures. We began implementing in Q2 of last year. Our business is operating efficiently and I'm excited about the results we achieved during the quarter and the momentum we're carrying into the back half of the year.
Onto our top markets, California replace Pennsylvania is one of our top markets by revenue in Q2, we are seeing price stabilization in both the wholesale and retail markets.
Retail strategy is taking hold and driven by our team's continued focus on finding ways to innovate and drive incremental wholesale in the market.
In Colorado, we built off of our restructuring efforts that took place in Q1 and started to take market share.
We continue to improve the quality of our flower and implemented opportunistic buying strategies, which helped improve our operational efficiencies in the state.
Further our efforts on revamping pricing in the concentrate business drove foot traffic into our dispensaries.
In Maryland, we saw an increase in wholesale demand in the weeks, leading up to adult use which began on July one.
We began to adult use sales at our three retail locations on day, one and have seen a steady increase in sales each week since then.
Going forward, we will continue to execute on implementing operational improvements in our facilities.
Producing new products and brands to the market and optimizing our pricing strategies.
We have one additional retail location in development to get to the market cap before we've also we're also in the process of relocating one of our locations to be better suited location for adult use as the market grows.
New Jersey continues to be a top performer for us in both revenue and adjusted EBITDA. Our wholesale business is growing and we continue to launch products to meet consumer demands in the market. We have one additional retail locations in development.
Ohio continues to represent a growth opportunity as 30 dispensaries are set to open from the 73 recently awarded.
Optimize our wholesale production and look forward to the growth of wholesale demand in Ohio as incremental stores come online.
In Pennsylvania, we have been leveraging different pricing strategies to drive foot traffic into our retail locations.
During the quarter, we introduced additional products from our national brand portfolio to the market and look forward to expanding that offering in the balance of the year.
Turning to Virginia, which continues to be a top performer in both revenue and adjusted EBITDA. We saw an increase in wholesale and continue to expand our product offering in the market, which Jesse will discuss in a moment.
Eric mentioned, we opened three new dispensaries in Virginia. This year two in Q2, two in Q1, rather and one in Q2, we just opened another location in Suffolk. This month, bringing us to a total of 10 in the state.
Two more in development, which we plan to open next year.
Over the past 18 months, we are focused on improving the fundamentals and stability of our business that will allow us to operate more efficiently specifically, we will be able to make real time decisions at the hyper local level with subject matter experts across our supply chain.
It will enable us to continue to produce strong genetics and an increase in our THC levels going forward, we have a solid foundation for these improvements among others and I'm excited for the benefits it will provide.
So far in Q3, we continued to drive operational efficiencies across all of our locations.
We have a lot to look forward to as the company heads into the second half of 2023 and I believe we are well positioned to succeed in our growth markets and drive efficiencies in our mature markets.
To the entire team for their continued execution I will now turn the call over to Jesse our Chief commercial officer for additional commentary Jesse.
Thanks, David I'm excited to be speaking to you today is the company's first chief commercial officer, and I'm, even more excited about the future of Columbia care.
The newly expanded role I am now overseeing retail wholesale marketing communications and technology for the company.
I'm entirely focused on defining retail excellence and what that means for Colombia care, providing that experience to our customers identifying ways to optimize the supply chain.
Using technology and data to develop products and services that complement our existing product portfolio and consumer experiences.
As you know earlier this year, we examined our organization as a whole and made changes and allow us to operate more efficiently.
This means creating a structure in which constant uninterrupted flow of information exchange between our front and back of house. This is critical for developing an environment, where we can innovate informative for you to meet the needs of our consumers to achieve this we need to continue to improve upon our technology infrastructure and in building brands that will propel Columbia care as we embark on this next chapter.
Until recently those plans are on hold due to the transaction with the sale lifted we look forward to accelerating innovation across the organization to change and enhance and where needed disrupt the way business is conducted in the cannabis industry.
During the second quarter, we expanded our product portfolio and launched new Skus and several of our key markets.
We continue to expand upon one of the most comprehensive and widely distributed houses of brands in the space I'll quickly touch on a few examples of this innovation and SKU growth within some of our brands that occurred during Q2.
Steven stream, one of our lines of flower and flower derived products that is currently available on 14 of our markets. During the quarter, we launched one gram vape carts and flavored tinctures and New York Newgate varieties in Virginia, and we're gearing up to bring multi payroll tax to new Jersey.
Our award winning Amber concentrate line continued expansion with shatter launched in Maryland during the quarter and thanks for the introduction of our new extraction method in Illinois, we were able to expand our concentrate offerings and launched live resin batter and library bid parts in that market.
In Arizona, our Amber Diamond Best won first place for best isolate at the 2023 okay.
Our highly sought after press tablets are now available in nine markets with Florida being the newest markets in March we introduced pressed to pointed out were in West, Virginia, and our targeted effect oral dissolvable tablets shine rally in dose and West, Virginia and Illinois.
We launched highly our fast acting cannabis infused gummies across six markets late last year, we've continued to expand our offerings across the country, introducing new flavors, and new Jersey, and raspberry infused chocolates in Virginia.
The launch we've expanded into three additional markets, bringing the total number of markets in which he is available to nine.
Passenger has been a challenge for our team and company, but that Hasnt kept us from envision a future where we've used the learning opportunities from interactions with our consumers service providers and peers to help evolve Columbia care and ultimately the industry. We are ready to reignite the spirit of connectedness to bring us all back together and collaboratively redefine who we will be to our consumers and the communities we serve.
We're no longer on pause and we've never lost sight of the bigger picture.
For those of you who know me you know how hard and fast we intend to run in a sense. We have been given a second chance to continue the pursuit of something we passionately believe in and we fully intend to embrace the challenges ahead.
I'm incredibly excited about the opportunities we have to grow and provide best in class experiences to our customers.
Business partners and colleagues.
Get to choose how we tell the story of our company lean into what resonates and evolved from what doesn't and I look forward to providing updates on our progress on future calls and with that I'll turn the call back over to Nick to take your questions.
Thank you Jessie as you can tell Columbia care is exceptionally well positioned for growth and we are on a clear path to improving profitability positive free cash flow reduce debt and interest expense and further increase market share and the best markets in the country.
Exceptionally proud of our entire team, we're all now poised to drive growth for new Columbia care.
Well. Thank you all for your time today and operator, let's open up the line for questions.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
These standby, while we compile the Q&A roster.
Our first question will come from Aaron Grey with Alliance Global Partners. Your line is open.
Okay.
Hi, good morning, and thank you for the questions.
First question for me, obviously been a lot of focus on the balance sheet and cash flow recently, particularly after canceling the acquisition.
But in the spirit of candidates remain near golf industry can you speak to your capabilities to capitalize on the growth opportunities amid some of the capex pull back or maybe your plans to <unk>.
Invest in Capex for future growth do you believe there is current capacity that is sufficient to drive the growth, we see the opportunities or the focus and the focus on our balance sheet won't lead you to bypass on any attractive growth opportunities that you see.
Sure. Let me, let me start off and then I'll turn it over to the group to just sort of filling the gaps.
We have built out our entire manufacturing and cultivation infrastructure nationally alright. There are marginal changes, we can make that will improve specific product offerings or add skus, but the most intensive component of any cap capex curve for our business and our industry has done.
For Columbia gear.
What you see us doing going forward is really sort of.
Is allocating any discretionary capex into the retail setting.
There is there is no doubt.
In any of our mines that we have the capacity to grow our supply chain.
With the growth of our markets and basically supply in both the wholesale and retail demand that we see coming out of the next let's call. It three to five years.
The changes that we're making to the business that would require a discretionary capex really relate to opportunities that are already sort of sitting in our labs. So for example, a third dispensary in New Jersey.
Another dispensary in Maryland like these are markets, where we simply haven't found the right right location.
We're actually developing a particular location.
But that's not very capital intensive so I think unlike many of our peers and you remember I'm sure Erinn.
And years ago in quarters ago.
We actually had pretty significant capex for quite a long time and that was to basically position us to where we are today, which is have we have the scale in the markets, where we want the scale, we have the scale in the markets, where we need to scale.
We are positioned as one of the largest suppliers in the markets, where we want to be the largest suppliers both on the wholesale or retail side. So.
There's nothing about our existing portfolio or Capex plan that wasn't done deliberately in that would limit our ability to actually capitalize on the opportunities, we see going forward and by the way because we've already spent the money.
What youll see over time is that the efficiency of the way those assets are leveraged ought to be enhanced and so let's go back to the statistics that <unk> shared with you. When we went through the cost reductions to improve free cash flow. The tradeoff. We made there was to basically consolidate manufacturing and cultivation into a handful or in <unk>.
Fewer fewer sort of let's call it square feet of utilization. There is 500 gross margin points roughly of underutilized capacity.
We began to use would effectively fall to the bottom line.
So the way to think about Colombia cure isn't do we have enough infrastructure or capex to actually handle the growth the way to think about Colombia carriers, what happens to our income statement. Once we begin to re utilize that underutilized capacity and we can back that 500 points of gross margin.
Because thats, where you see real scale, especially in the context of the changes that we've made to our SG&A over the past call it three quarters.
That's going to happen overnight and that's part of the longer term plan, but when I talk about sort of refocusing our efforts into improving gross margin. It has everything to do with finding a way to recapture that roughly 500 basis points of underutilized capacity, that's from an absorption capacity.
Absorption accounting perspective is really impacting our income statement.
And by the way that's.
You can see what happened to our EBITDA quarter over quarter, that's all incremental to what we've shown so let me let me turn it let me stop there for a second and see if.
Eric or David or Jesse has anything that they'd like to add.
Great.
Eric Thanks for the question and.
That's a good we're talking about growth initiatives and investment rather than what as you said, we've been talking about for last few quarters, which is just balance sheet management.
I Echo Nicks comments, our objective is to.
Execute on capital deployment as efficiently as possible, we've got certainly debt capacity, if we want to it we've got improving cash flow from operations.
We're a different company than how we've been operating in the last few years, where the investment has been to expand geographically and as Nick said, the major investment in new markets as cultivation activity.
We've got an abundance and to the point, where we've done some off.
There are opportunities, we'll continue to look at our capital we can deploy as we need to and in the meantime, we will continue to focus on the growth Capex and maintenance capex in the new store openings that we have Linda.
Hey, Brad This is David the other thing I would add Ohio, Pennsylvania, and New Jersey, and New York and Virginia, All have extra excess capacity that we think can meet the market demand as it comes on either with incremental medical program development or adult use. So that's literally just putting plants under lights that are already there. So that's significant incremental capacity and highlighted by.
The Capex, we spent last year, which was north of $70 million. So we've spent in the markets. We knew we're going to have growth opportunities just a matter of timing and matching up the utilization with that with the growth trajectory.
Just do you have anything you'd like to add.
No I think David covered it obviously I think the exciting opportunity to continue to.
Sort of expand organically in those markets that was highlighted it's something that we're really looking forward to.
Okay, great thanks for that color.
Looking at the West Coast markets, California, and Colorado remain top two revenue market, but.
But not for EBITDA at one point, Colorado is also a top EBITDA market about a year or so ago. How are you looking at those markets in terms of the near and long term.
We've made some some constant bulk, but how do you feel like the current portfolio fits within your own given the focus on cash flow do you see those markets turning around in the near to medium term. So just your outlook on those two markets would be appreciate it. Thank you.
Sure.
Excuse me so let me before I hand, it over to David and Jesse.
I think the way to think about the statistics we share.
Sure.
It's not that California, and Colorado haven't sort of continued to show improvements over the past couple of quarters is that we've seen spectacular improvements in other markets right. So when you have a market like Virginia. It moves so quickly from sort of outside of the top five to top five in New Jersey.
Youre always it's not about the margin profile is about the actual the aggregate dollars in California and in Colorado are large markets for us So I wouldn't read.
I understand how you might sort of.
Ask the question, what California, and Colorado look like relative to other markets because those are mature markets. So they're not growing as quickly.
They are certainly getting better I mean I'm sure you saw the stats we highlighted on the on the sort of the shift we made in asset.
In the asset base out in California, and the impact that will have to overall profitability.
We've made a lot of changes in Colorado that sort of that.
That reflects a similar similar kinds of changes and similar trend lines I think the most important thing to remember is that.
Every market we're in on the West Coast, Let's say west of the Mississippi, you've seen a proliferation of assets and the maturation of those markets.
Typically require some type of consolidation and that's either through consolidation through M&A or consolidation in terms of rationalization of the actual marketplace.
I think in Colorado, we've started to see some of that take place, California is a different animal altogether, but for different reasons. Both of them I think are stable to improving but let me turn it over to David and he can share his thoughts and then we can turn it over to Jesse.
Thanks, Nick both of those markets, there's been a ton of activity operationally behind the scenes that probably doesn't get the recognition. It deserves from the local teams. We've we've exited assets that didnt make financial or strategic sense as Nick mentioned, we have seen price stability in the California market, we have seen some stability in the Colorado market, particularly in our <unk>.
<unk> stores.
We've changed the way we are buying third party products in Colorado similar to the way we do it now in Arizona, and California, and so that does help from a margin perspective, but we have done a lot behind the scenes to reposition those assets to be prepared for the long haul.
If you look at the state of Colorado.
A significant number of cultivation.
<unk> licenses that are either dormant or had been turned off and not renewed and we think that's going to continue and so.
If you look at the lack of outdoor grow that's taking place this year, which typically has a disproportionate downside impact on pricing for the balance of the year and into Q1. All of these look like if you aggregate them up into a more opportunistic landscape for us on a go forward basis. So there is still more we need to do at the hyperlocal level operationally to make sure we can.
Continuing to compete and improve improve the business, but I think what youre seeing is a more streamlined rationalized asset base for a changing competitive dynamic with hopefully some improved pricing stability on a go forward basis, but Jesse maybe you want to speak to this.
In Colorado in particular, some of the things the team has been doing at the retail level to help from a pricing perspective and foot traffic perspective.
Yes, Thanks, David I think in Colorado is a great example of where.
The improvements that we've seen from.
Backup House point of view with regards to quality of flower introduction of some new brand architecture and product skews things like that it really helps to reinvigorate some of the opportunities for customer acquisition to be able to speak to you.
The customer base and bring people back into the store I think the emergence of our owned applications like loyalty. The stash cash application some improvements that we've seen in customer engagement through the high delivery rates of things like push notification on mobile and a number of other strategies have also helped to create better.
Sort of awareness and communication between the customer base in Colorado, which is obviously a mature.
Very well informed customer base and what it is that we're doing at the retail level to provide sort of that that better selection and higher quality product set at incredibly competitive pricing. So I think all of those things combined have led to a stabilization, but also a growth opportunity from the retail front and again.
In California, we continue to see excellent execution.
Execution on the retail side.
In that market.
Provided those opportunities. So we're excited about Colorado now that we've sort of seem some of those early indicators of.
Opportunities for continued success in the market and we have a number of new initiatives coming up over the coming quarters to engage with that retail platform and bring it in line with some of the best practices that we have across the country with the cannabis platform. So that's something that we're looking forward to.
Okay, great. Thanks for that color and just one quick one if I could before I jump back in the queue.
You guys had mentioned a senior exchange post the <unk> termination just any update on that I know it was mentioned in the prepared remarks, so any update on potential USC interchangeably appreciate it. Thanks.
Hey, Aaron it's Lee.
At present.
On timing I think you've seen some of the measures. We've taken were delisted from the CSC. So nothing much that we can add at this point, but we look forward to updating when we can.
Yes.
One thing that you can imagine for those bondholders that werent interested in being restricted.
Wanted to wait until our earnings came out to get the latest greatest financial.
So I think that we'll be able to show more progress once now that these numbers are finally out.
Okay, great. Thanks, I'll jump back in the queue.
Thank you one moment our next question.
We have a question from Frederico Gomez from ATB capital markets. Your line is open.
First one here on Maryland.
The biggest contributor to adjusted EBITDA, and just thinking about the margin profile of that stake.
As we continue to see adult use sales ramping there how much more I guess operating leverage could be getting that business that that could potentially benefit your margins in the.
Second half of this year. Thank you.
So let me be clear I don't think we said that Maryland was the single biggest contributor to adjusted EBITDA. It was a contributor.
But there were several pretty.
Pretty significant contributors to the improvement in adjusted EBITDA, but David maybe you can talk a little bit about the sort of what we've seen in Maryland and habits.
Our infrastructure has been able to scale into sort of the market opportunity sure. So.
You saw a fair amount of buying activity from from a wholesale perspective into the first day of adult use sales. We've continued to see a strong steady robust opportunity in the wholesale side given given the asset base that we have in Maryland, We continue to review and analyze to make sure. We can optimize both the revenue and the profitability profile of that state. So.
Optimizing where we're allocating biomass and finished goods across both our three retail doors in the wholesale market.
We recently moved into a <unk>.
Larger manufacturing facility that is essentially a co located with our cultivation facility in Maryland, which has been tremendously helpful. Thinking about adult use incremental throughput is obviously needed for us. So we continue to be optimistic about about the the balance of the year for for Maryland and.
Depending on what level you'd like to pool, you can optimize revenue <unk> profitability, but we're trying to do both to do both and so the window for wholesale is obviously a pretty strong right now, but we're also we're also mindful of the fact that putting our own product on our own shelf.
Results in our highest gross margin opportunity for us in the near term so.
It's a good it's a good problem to have for us and the state of Maryland, but we continue to be eyes wide open to make sure we're being balanced in terms of building brand recognition not only in our doors, but also in the wholesale market.
The only thing I would add to that before I ask just you know women with some thoughts.
As David mentioned, we.
I have one other dispensary in Maryland, that's basically in development in PG County, which is one of the highest density and.
And wealthiest counties in the state of Maryland.
I would actually be sort of a very unique asset in a very very attractive marketplace.
So that's in process. The other is we're moving one of our existing dispensaries to a larger location to accommodate the increased increase volume and so I think.
The reason why those two data points are important is that.
David mentioned, we've seen a significant increase in demand from the wholesale side, especially amongst our sort of let's call. It our concentrate products in our branded products, but just as important by having more doors in Maryland. It makes us a very very credible sort of fully integrated partner that will allow us to I think drive margins more effectively and be a better counter.
In the wholesale market so.
Basically it's an echo chamber of I think.
Our benefits that we can we can basically sort of be one of the one of the better better partners for both from a consumer perspective and from a business perspective, let me turn it over to Justin <unk> anything to add.
Thanks, Nick the only thing that I would add back coming off the comments from you David is obviously, the the sort of.
Focus on wholesale both organizationally and strategically that we've launched over the past few weeks coming out of the transaction we have dedicated.
<unk> sort of team members that are being built across the country in Maryland was one where with the integration of the team from GE Leap, we already had a good sort of foundation of both strategic leadership and individual contributors who were able to participate in that program and sort of pick up.
The velocity from where we were and I think we're already starting to see.
Some of the benefit.
You bet structure that focus so as we continue to invest in systems.
Team members to be able to pursue that strategy.
Maryland, I think thats become a bit of a leading indicator for what we believe we will see is continued productivity across the country. So I think that that wholesale.
So the velocity that we're seeing in the market will be indicative of what we see across the country as we continue to build out that program.
Thank you for the color there and then just on Virginia about the market dynamics. There can you comment on that what Youre seeing.
I guess in terms of pricing the supply demand there and also drove opportunities. Thank you.
This is David So Virginia continues to be a top contributor for us. It's an expanding medical program I think if you asked any of the any of the operators in the state of Virginia, what they probably say is just increased patient access is the is the opportunity to grow that market every time, a new door openings. There is an opportunity for patient growth to take place.
That presents an opportunity not only if you own the door to put more and more of the arm product on the shelf.
I think putting third party products on the shelf as well, so a more diversified portfolio and all the doors.
Is also something I think everybody is trying to move forward with that for the balance of the year. So I think it's a great market from a patient perspective, I don't think it gets any easier now to register and become a.
Patient in the state of Virginia.
For us overtime.
I need to do is accelerate the remaining doors and as Nick mentioned earlier in the call. We're just being opportunistic and making sure. We're finding ideal locations that we can use not only for our medical program, but for the adult use so to more doors for us to open but we continue to remain excited about the state of Virginia. There is tremendous growth in the marketplace as a medical program and price.
Price has been stable for us I think we continue to look at innovation, Jesse and teamed with our local team.
We are spending any incremental capex is for is for new technologies for new manufacturing methodologies to introduce some new products into the marketplace on a post harvest basis on the concentrate side, so thats an opportunity for us in Virginia, but very excited about the state of Virginia.
And continue to see see growth for the balance of the year.
Thank you Patrick.
Thank you.
Yes.
We have a question.
From Matt.
Bottomley from Canaccord Genuity your line is open.
Yes, thanks, everyone I appreciate the commentary just now on Virginia, and just wanted to circle back to two of the other key markets that drove growth in the quarter of Maryland, and New Jersey. So I know you talked a little bit on the operational front in Maryland, but I'm wondering if you can speak.
At all with respect to.
The ability to.
Look at what you have what the market has done in Maryland, which I think has gone to X.
Over at least in the first month over what it did in the in the <unk>.
And how that might have.
Sorted out.
With respect to how your operations have done and then in New Jersey, just if you think any new store openings are going to be in the cards for the second half of the year.
Hey, Matt. This is David So I think I think the local teams did great in the state of Maryland.
The stores were legacy <unk> stores, one was Columbia care and I think the team did a great job coming together to two.
Pre game, if you will the incremental throughput that was going to hit those stores. We've obviously seen it in a number of markets that have transitioned to adult use so we knew what was coming.
And we tried our best to leverage the footprint that we have and balancing technology to really get the lines moving I think we did a great job from a pricing perspective, we were disciplined with new people, we're going to come in and the team was excited to see that to your point significant increase in foot traffic at our doors.
I think we saw what we expected and the market in Maryland, we've seen this in other in other markets as well so nothing out of the ordinary for us other than just execution for us and as Nick mentioned getting the fourth store opened in getting that third one relocated.
That would be ideal for us.
And I think Matt it's safe to say that we saw.
We saw consistent growth with what the market's off not a little bit better.
Okay great.
I'm sorry, yes. So is that on New Jersey, I think we do continue to expect to see doors opening in the state.
We've got a dedicated wholesale team in the marketplace, which is unique for us as we build out wholesale.
And I think it is going to continue into next year as well, we obviously have another door, we'd like to open sometime in the first half of next year nothing nothing takes place quickly and the state of New Jersey, but we're in front of all the new doors that are opening we're monitoring our new sales for a second and third orders for all of these new doors that are opening in trying to do our best to provide the customer service levels I think.
That they are looking for in the states. So we remain opportunistic.
When we can when we can see the new doors opening we're getting in front of them before they actually open their doors to try to win the business.
Got it appreciate that and then just one other question for me just on the balance sheet. So you gave some good color in some of the prepared remarks, but im wondering if theres any other low hanging fruit. The subsequent raise of about $8 million. After the quarter. Obviously, some some cash inflow from some acquisitions. So from dispositions just wondering if there's anything else.
Just in terms of category that might be something in the relatively near term that you guys would have access to if needed.
Yes, I mean look I think that aside from the sort of the national restructuring that youre going to see US go through to just sort of delever across the board on the sort of the traditional senior debt.
Outstanding and really pushing back those thirteen's.
And then moving on to the <unk> and then moving on to the nine five.
We have inherited a couple of pretty pretty punitive sale leasebacks from from acquisitions and those are not at market rates.
I think that Derek correct, if I'm wrong, but.
Our best guess is that those those sale leasebacks are somewhere north of.
North of three to 500 basis points ahead of where we would be paying if we had just traditional debt structures in place.
And so that's for US we consider that low hanging fruit and we've had conversations with IPR about those and I can tell you right now we're not the only ones that are having those conversations.
We're hearing through the marketplaces that there are a lot of people that are very unhappy with the way those those instruments are structure and so we've already reached out to them to sort of see how we can find the collaborative pathway forward.
And actually find a more market market rates sort of structure that would make sense for us to just sort.
To continue those relationships.
Okay. Thanks, so much for all that.
Thank you and one moment our next question.
Our next question comes from Andrew Semple with <unk> capital markets. Your line is open.
Hi, there good morning, and thanks for taking my question.
And congrats on the Q2 results.
Wanted to go back to the comments in the prepared remarks about underutilized cultivation assets being a drag on margins.
Could you maybe just give us a sense on timing on when you would expect some of those impacts to wane.
Should we be.
Incorporating this.
This headwind kind of unwinding in their models.
So.
Before I turn it over to Derek and David.
<unk>.
I think that.
Anytime you sort of make the decision to reduce capacity.
And really focus on cash flow that is going to continue to be our focus. So our goal is to drive it should drive cash flow from operations and to drive profitability.
Taking the hit on EBITDA.
We made that we made that decision a couple of quarters ago.
At this point the way, we're thinking about building rebuilding that demand profile is over time, and so I wouldn't expect any any structural changes any massive changes in gross margin, but any changes that do happen to gross margin have a disproportionate benefit as it flows through the income statement.
And why I say that is we're not looking for quick fix.
Said this two quarters ago, I said, it last quarter I'm going to say it again.
The way we're running the business right now is about singles, we're not looking for homeruns and we're not looking for sort of overnight wins, we're looking for very long term solutions permanent solutions to make sure that we have a sustainable predictable platform that drives it.
<unk> profitability.
The growth is going to come because as a byproduct of the markets, we're in and as a byproduct of the capital investment we've already made and so we're not worried about that what we really want to make sure is that the headwinds that people continue to talk about throughout the industry, which is pricing headwinds, we find an intelligent way to address that.
We take advantage of the fact that we do have a lot of embedded upside built into the infrastructure, that's already paid for and built out.
Basically just waiting to be used so.
When I talk about the gross margin improvement at that 500 basis points. We're looking at are at a two year cycle right. We're not looking at a like a two quarter cycle.
If it takes longer it takes longer but.
We feel very confident we can do this and we're actually pretty excited about it because every incremental dollar of gross margin goes literally right to the bottom line. So let me, let me turn it over to Derek and David and just anything you can talk a little bit about that because I think thats an important strategic aspect of the way we think about the next eight quarters.
And this is Eric I'll just jump in on the markets, where we have tenants down there are a number of them are pre adult use markets.
Adult use switches in some.
These locations we've got the capacity that we will turn it back on we've already got the overhead investing.
So that will come out soon as those markets turn.
We've also.
We've also got the wholesale initiative that Jesse mentioned already whereas we increased wholesale opportunities in some of these markets and also.
Some of the <unk> that we've been improving as well of our own brands as capacity already there to support that.
It's really a question of when markets turn and how quickly we can execute on those initiatives and that five percentage point overhang on gross margin will gradually with lower in those buckets.
Yes.
Yes.
Jesse anything to add about the way, we intend to sort of address some of the some of the utilization capacity.
No I think we're looking at a couple of were engaged in conversations with a couple of strategic opportunities.
Yes, I think we will look forward to updating as those come to fruition.
Excellent I appreciate the color there that's helpful for setting expectations.
And then just wanted to maybe dig into Florida, which we haven't spoken too much today and I was just wondering what the kind of the update on the growth plans in that state are.
Since the transaction.
Yes.
Unraveled here are you turning any attention, but states or is the focus on some of the other four markets that we've been spending time on.
Well I think for US we have a lot of high growth markets that we're focused on Florida has I think David can speak to this if you look at our competitors. The vast majority of the dispensaries that people are building out our in Florida right now so from our perspective, when we look at just the population analysis forget about a transition to adult use it's our view that there is a it's an enormous.
Competitive market and you have two incumbents that are very very sort of aggressively going after one another that have significant scale.
For us the Florida opportunity is interesting, but we have to be more of a niche player we have to be more of a sort of a targeted player.
I think we have to play a different game than we would play in say in Virginia or say.
Colorado.
The just a sheer velocity of new doors opening amongst licensed operators.
<unk> like <unk>, something we havent seen in any other market before and I think part of the reason for that is if there is no. It's an unregulated market for the for all intents and purposes, you can open as many doors as you want and at some point youre going to just run out of sort of incremental demand. So.
So for US, Florida is a market that we turned our attention to but it's really been much more focused on cost containment and basically.
<unk> the right products that we can really differentiate ourselves with rather than trying to place. The Walmart game, which is dominated by a couple of players that.
I have basic.
Basically made the decision for that to be their home market.
What is our answer to that our answer to that is Virginia. Our answer to that is New York our answer to that is Colorado right. So we have other markets, where we have leadership positions and significant scale, Florida not one of them, it's not to say that we won't be growing in Florida, but I think there are other markets that we would prioritize ahead based on the limited license nature of some of the markets. We're in.
<unk> creates sort of a more favorable advantage for for operators in that type of environment, but let me turn it over to David maybe you can add some stats and Derek and Jesse you can add some color as well.
This is David I would just say that we're comfortable with the asset base. We have right now we've got three grows we're actually just scaling up into our third and we are seeing an improvement in <unk>.
THC levels and total Tac, which is important in the state of Florida. So.
As Nick mentioned, we have taken costs out of the business on the retail side, we've been very thoughtful about expense management down there, but we're happy with the door count that we have relative to our back of house asset basis. So the next point, we're going to spend an incremental dollar of capex, that's going to be into the other markets, where we're either.
The top player we're a top player and have an opportunity to take incremental market share, but we're happy with the assets. We have in the state of Florida right now, it's just not top priority from a new new capital deployment perspective.
Yes, it does anything to add.
Lifting that covenant.
I think no.
Okay.
Great. That's all for me Congrats again on the Q2 result back into gear.
Thank you.
Thank you and our next question will come from Scott Fortune from Ross Your line is open.
Hey, Good morning. This is Nick on for Scott first question for me just on the overall mix you mentioned owning about 70 high potency strength can you just comment on the mix in the quarter between the premium mainstream and value just within the flower category here and has there been any kind of discernible shifts in consumer behavior on that side over the past six months.
Yes.
So you want to take that.
Sure I think without getting into too much granularity and detail.
Because of some of the shifts that we've seen in the quality coming out of cultivation. We have continued to index higher into what I would say sort of upper made some premium flower coming out of the facilities in a number of states sort of continue to set really high benchmarks with regards to what that what that percentage looks like I think Colorado is great.
Example of where we mentioned earlier on the call that we've put in place.
More strategic procurement initiatives that have allowed us to bring in.
Hi, really advantageous third party product a lot of that is in the lower priced categories flower to sort of supplement.
The necessary merchandising that we need in that retail strategy as we've continued to see an uptick in the production in Colorado with regards to the flower thats coming out of our own facility.
These are all these are all great problems to have I think from a consumer behavior point of view, we've definitely seen an uptick in sort of those in that climbing that ladder on good better best strategy with regards to consumers moving out of.
Value selections into more of the maids and even in some cases for premium premium flower is still something as an industry, we know that when you.
When you have great flower and it hits the shelf, it's going to be sold.
With good velocity and youre going to Youre going to get good pricing for it so I think the <unk>.
<unk> of the middle has been a promising sign in a number of markets as we see that increased stability from a consumer spending point of view.
And I think the other thing that's been exciting as we continue to experiment with different bulk and packaging sizes across the spectrum of that flowers, but not necessarily into the super high premium, but in brands like classics from Seaton strain for us which are in that better category, we've seen some larger format.
But it's been very well from a sales point of view so.
Without sort of going into every individual market and speaking to the allocation I think the overall theme here is continue to see an increase in testing and quality coming out of cultivation nationally. Thanks to the team and those that therapies that have been implemented in a number of facilities and thats ultimately led to our own first party brands.
Seeing a higher concentration of <unk>.
<unk> premium with regards to the flower that we're putting on the shelf.
No I appreciate that color. Thank you and then second for me just on Ohio, you mentioned enhancing capacity there just kind of looking for an update on the supply demand environment and maybe just maybe potential timing for adult use coming on line in that state.
So.
Why don't we turn it over to the ops first that I can comment on the sort of adult use conversation.
I think everybody has talked about the pricing dynamics in Ohio have been challenging I think people are expecting doors to open and it's been a slow ramp, but we do expect doors to open so any any potential pressure you might see on the on the retail side for incumbents I think you should see an opportunity on the wholesale side, there's obviously a number of non vertically integrated players.
And the state of Ohio, as well and so I think you continue to see people that are vertically integrated finding ways to to be thoughtful.
The new door opening opportunities in the state. So I think the pricing compression in the challenges people had seen we obviously have seen the same but I think we've been able to weather the storm again and really focus on expense management and the state of Ohio.
We've now integrated the fifth location, which was a <unk> location as of the end of July .
So the teams are actually going through that process right now and we do have incremental capacity. So Ohio is one of the states, where we did take down plan count.
We can't be reduction so we've got an opportunity to lean back into that and it's one of the states where we've brought in a few new products to develop and there's probably some small capex that we might make in that state on the post herbicides as well to bring in some new products. So theres a lot for us to do operationally, there and I think.
As Jesse just mentioned, having the right mix of high quality flower and in domain concentrates goes a long way to driving not only for traffic in your doors, but creating wholesale opportunities.
In terms of the political environment.
I would break it into two different categories. There is what we know and what we don't know what we know is that the new dispensaries that are coming online will be a net add to access for patients.
And those are going to be very very helpful from a wholesale perspective.
Almost doubling the size of the dispensary count which is great news.
From a <unk>.
Legalization perspective, an adult use perspective.
Everyone believes that the sort of the passage of the let's call it a voter referendum.
Is something that will certainly provoke a responsible legislature with Ohio as an environment, where the legislature can do a whole range of things, including effectively disregard or change the voter referendum, so that it's almost irrelevant.
And that happened probably not will it happen in the same way that deep.
People are hoping probably not we will be somewhere in the middle probably and so how that how the legislature ultimately decides to sort of transition a voter referendum into something more tangible is going to take time, it's not going to be overnight and that's why I want to focus everybody on what we know today and whats happening today because.
The increase of the market size today is meaningful and the access the ability to access that market on the wholesale and the retail front is meaningful.
Now what does that portend for the future. It means you've got a definitive pathway for a growing market and does that mean the market goes up like it did in Maryland, a 100% overnight, but it doesn't mean it looks like more of something more like Illinois, or Massachusetts, where it went up by multiples, it's probably the latter but that doesn't happen this calendar year.
Happened sometime in the first half of next year, but thats going to be a very long politicised process that will all have insight into.
I wouldn't I wouldn't bank on it today because there is enough there are enough things to keep everybody busy and keep everybody excited about Ohio in the meantime.
Great. That's it from me I appreciate the color.
Thank you.
Thank you.
One moment for our next question.
We have a question from Ty column with eight capital your line is open.
Hey, good morning, guys. Thanks for the question mindful of the time here I'll limit myself to one I'm just wondering if you could provide a little more color on the operating cash flow this quarter as we're waiting for the full queued ahead.
Specifically I'm looking for the contribution from working capital and tax payables here.
And then maybe if you could also comment on how those two items are going to impact cash flow for the balance of 'twenty three that'd be great. Thanks.
Yes. This is Derrick I'll cover that so the operating cash flow as youll see in the Q when we file later today.
313000 outflow, so essentially neutral at the contributors to that from the adjusted EBITDA improvement quarter over quarter.
And from a working capital perspective.
We did have a reduction.
Quarter over quarter, we're starting to see some of the benefits we've talked about in previous quarters, with reducing inventory and that being a contributor to working capital.
We've been paying taxes in the quarter, we've deferred a small amount in the quarter and we're continuing to be a taxpayer and not using that as a major source, we still have that as one of our leaders.
But it's really the operating results improvement, that's driving that essentially flat operating cash at quarter over quarter, and we will continue to.
Drive towards that positive operating cash flow in Q4, as we stated at that target.
Great. Thanks for that color Dan.
Thank you.
We have a question from <unk>.
Glenn one second I'm sorry.
We have a question from Glenn Mattson with Ladenburg Thalmann. Your line is open.
Hi, Thanks for the question.
Just one from me Nick we've hit on most of the markets that youre in today, so far except maybe the two that might have the have the biggest potential change in potential impact.
Sure.
Happened, there and Thats like New York, and Pennsylvania, So maybe over the next like.
Realize there.
There's a lot going on there, but maybe could you just give us an update quickly.
Those two markets are developing.
And.
Those two markets seem like two that could make you make.
Feel more excited about the company over the next say 24 months or something so maybe maybe just some color on those would be great.
Well I am pretty excited about the company without those two markets, where those two markets I think I get frothy.
But the so let me let me take the easy one first ironically its Pennsylvania.
We have arguably the most scaled manufacturing and cultivation infrastructure in Pennsylvania, and obviously why that matters to us is not because we have a huge retail network in Pennsylvania, but because we have a huge retail network outside of Pennsylvania at outside of Florida, and so we become a very very valuable partner nationally for the larger players and as we all know.
Yeah, It really has it.
Over indexed the MSL footprint.
And so that becomes a very important strategic tool for us, especially as adult use comes in I think that.
How it comes when it comes it's probably first half next year is it looks like it's going to be legislatively, driven and it looks like it's going to be bipartisan. So I think that thats, a thats a net positive for us and by the way. That's that is one of the facilities that we reduced canopy and more so than any other market. So if you ask me like what.
Single facility would have the biggest single impact on our financial performance, if we could get it right, it's going to be that manufacturing cultivation facility in fact in Pennsylvania, and so thats why that becomes so important for US New York.
Sure.
New York is a fun one to talk about I think if you probably go into management team offices around the industry.
And around Albany, and frankly around law enforcement I think that the.
The New York regulators are probably have their face on almost every single Dart board that you could find them and thats because they haven't really done a great job of rolling out a program, creating a program that works and really enforcing their own regulations and its perplexing, because it's a $1 billion tax revenue opportunity for the state over the next several years.
And it doesn't seem to be getting the attention that it deserves, especially at <unk>, where the city. The state whatever municipality you look at New York, everybody is struggling to generate tax revenue.
And ultimately I think that's our saving Grace, which is you have a market that really is is open but isn't functioning.
And it's the only beneficiaries have really been the illicit market operators and I know that everyone loves to use legacy is euphemism, but not every not every legacy operator is sort of as an angel just like not every sort of regulated operator is perfect and so I think that the opportunity in <unk>.
<unk> is to work with the regulators to do our very best to explain to the policymakers, what a profound impact prop.
Properly regulated New York market would actually do for New York State.
And it actually translate into that to something thats functioning. We obviously have invested an enormous amount of money into New York, We have great locations. We have a team thats very motivated, but we continue to sort of improve and increase the offering and we're excited to work with New York State.
Just looking for that open that open the door to have a conversation that actually culminates in something thats constructive that isn't based in let's call. It.
Policymaking that is his depth to the realities of the industry and it hasnt really address some of the real problems of the underlying opportunity that New York is missing out on so.
That's a work in progress I think that you see the way.
Everything is heading right now we're looking for a fourth quarter rollout to include the Roes in the program, but it's New York. So are we building that into our forecast we are not should that be a 2024 impact it should.
But we're not in a place where we have any visibility into what youre thinking and so.
We're ready to take advantage of that and we're just grateful that we have a diversified portfolio, where this becomes a real growth opportunity for us long term rather than something that we are relying on for us to actually show improvement in the near term and midterm.
Yeah, great. Thanks, Nick Thats great color.
Okay.
Thank you this concludes.
Today's conference call. Thank you for participating you may now disconnect.
Okay.
[music].
Okay.
Okay.
[music].