Q4 2023 The Cannabist Co Holdings Inc Earnings Call
Yeah.
Okay.
Good day and welcome to the cannabis companies fourth quarter and full year 2023 earnings conference call. At this time, all participants are in listen only mode.
Later, we will conduct a question answer session and instructions will be given at that time.
As a reminder, this call is being recorded I would now like to.
Turn the call over to Asia, Gilbert Director of Investor Relations you may begin.
Yeah.
Thank you operator.
Good morning, and thank you for joining the candidates company fourth quarter and full year 2023 earnings conference call.
With me today.
Executive Officer, David Heart.
President Jackie Shannon Chief Financial Officer, Derek Watson.
Senior Vice President of capital markets, and Investor Relations Liane Evans.
Earlier. This morning, we issued a press release reporting our fourth quarter and full year 2023 results.
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.
Certain remarks, we make today regarding future expectations plans and prospects for the company constitute forward looking statements within the meaning of applicable Canadian and U S Securities laws.
<unk> 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, 2023, which will be filed with applicable regulatory authorities.
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.
Candidates company consider certain non-GAAP measures to be meaningful indicators of the performance.
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 David <unk> to get US started David.
Thank you AJ good morning, everyone and thank you for joining US today, we're pleased to discuss the results for Q4 and the full year 2023, more importantly, sure Howard keep driving this business forward in 2024 and beyond.
Im excited to be here at the helm as CEO joined by a dedicated management team who are passionate about representing the outstanding employees across our 15 U S markets.
We remain confident in the value of our strategic position and our focus on sweating, our assets to deliver for our customers partners and shareholders alike.
You may recall that in Q3 of last year. Once we have our freedom to operate as a Standalone company. Following argue with 16 months process, we undertook a number of initiatives to best position the company going forward.
During 2023, we announced and continue to implement our balance sheet improvement plan, which has already resulted in a decrease in interest expense reduced leverage and positioning us to satisfy upcoming maturities, including $13 million remaining in May 2024.
But part of that effort.
The increased inventory monetization reduced working capital needs to drive cash flow.
This work continued in the fourth quarter as we monetize certain excess inventory, which had a temporary impact on margins, but contributed to a healthier cash position at year end.
We completed the first phase of our previously announced corporate restructuring program contributing to annualized savings of over $38 million.
We began to optimize a stellar portfolio of assets with a focus on those markets that will drive growth and profitability going forward to date, we have exited markets such as Missouri in Utah, and we look to lean in where we believe we can drive the most value.
We launched our dedicated wholesale effort to capitalize on our national footprint and cultivation potential, which Jesse will discuss in more detail.
We rebranded the company from Columbia care to the cannabis company and we leverage our expansive retail pricing rolling out purpose, driven new products and brands across ourselves as we prepare for additional markets to transition to adult use such as Ohio, Delaware and Pennsylvania.
We are committed to continuously improving our operations implementing changes in our system to increase efficiencies wherever possible and building a winning culture to exit 2024, and a much better position to succeed as a team.
Be thoughtful about our footprint and where we can best capitalize on the tremendous opportunity before us as we see more of a market transition to adult use.
One of the first and most important steps to success has been to ensure that we have the right people in the right jobs with the right tools.
This is something that jetson are highly focused on it we understand the importance of winning at the hyper local level to that and Jesse and I've been meeting with local executives across the company throughout inefficiencies here come to frontline's on how to improve our processes and empower them for success.
You'll hear more about these initiatives in the coming quarters and should see the evidence of positive changes in each of our facilities.
Next as we look to maximize our existing cultivation and manufacturing footprint, we've reworked our organizational structure and go to market strategy for wholesale.
Wholesale has been underrepresented as a portion of total revenue for the company at 12% of total revenue in 2023, and we're looking to change that over time, we have invested significant capex dollars and creating an enviable portfolio of assets throughout our markets. We.
We are built for adult use and ready for these transitions with little to no additional capex required.
Flip.
However, our present many of our largest facilities are underutilized, creating a significant drag on our gross margin, which we discussed in prior quarters to address that you should expect to see a strategically ramping up wholesale across the portfolio and continuing to engage in key partnerships that will complement our own in house brands to complete our product mix in retail.
And strengthen our wholesale product offering.
<unk> seen a number of partnership announcements from us to date and there are more to come.
While 2023 with a year of transition for the cannabis company, we produce consistent topline revenue of $511 million with an improvement in adjusted EBITDA for the 2022. This.
This year 2024 is not about chasing top line growth. We are focused on margin improvement as co generation and long term sustainability.
Our primary goals for 2024 are to materially improve our financial profile and company culture. So that we can capitalize on the massive opportunities ahead for the cannabis industry.
Still in early innings, and we will be positioned for long term success.
To reiterate the first step is to have the right team in place at that time.
We've completed and I cannot be happier than to be working with the team that we have the energy commitment and frankly pure grip and our organization is absolutely inspiring we have great leaders and great people on the front lines driving continuous improvement.
As we move forward, we're focused on four key initiatives number one the hampering the customer journey for existing medical and adult use customers today as well as for the new customers that tomorrow its candidates transition to adult use and more of our markets.
Two capturing supply chain inefficiencies and sweating, the retail cultivation and manufacturing assets that we already have investments, we will leverage the underutilized capacity through wholesale growth in selected partnerships with winning brands.
And then the three capitalizing on the next chapter of Kansas evolution adult use adoption leads to increasing Tam and creation of new market segments and number four continuing to improve our capital structure to ensure our ability to grow responsibly over time.
The successful execution of our strategy will result in a leaner operations improved inventory management and enhanced cash flow ultimately driving sustainable profitability and shareholder value.
Before I turn the call over to Jessie Let me just recap where the cannabis company is going.
We're exceptionally well positioned in markets that are poised to transition to adult humans with states like Ohio, Delaware and Pennsylvania all in cost.
We've made the necessary investments in cultivation manufacturing and retail and the opportunity remains to sweat those assets to drive returns with very little additional capex required.
We have incremental opportunities and additional product brands to complement our assortments.
Our wholesale business interim value creation machine and empowering our team members on the frontline to focus on providing the best customer service and experience as possible.
Broadly we are reevaluating every aspect of the business if something isn't working we will address the issue head on.
With that I'll now turn the call over to Jesse to give you more color and some of the play by play Kathy.
Thanks, David in 2023, we made considerable progress as a company that enabled the clear direction. We have now as we engaged in detailed examination of our business looking for ways to optimize our portfolio of assets and take advantage of the improvements we made during our corporate restructuring.
In addition to rebranding at the corporate level to the candidates company in late 2023, we made strides on the product branding fronts expanding the reach of our in house brands in markets, like Virginia, and Florida, and re engaging with third party brand and product partners in the fourth quarter. We saw sales of our in house brands increased once again to 51% of retail sales.
New brand launches in 2023 included heavy edibles across our markets feeding strain and classics in Florida as well as Triple seven in Virginia, We also standardized and expanded our edibles offerings under our national heavy brands with products such as effect based edibles customers can expect to see more unique and creative products like this as we continually strive.
To ensure that there is something for everyone on our shelves.
During the fourth quarter, we also announced several strategic commercial partnerships launching collaborations with old palette, Maryland, and Virginia Aero brands in Delaware, and then an expanded partnership with butter cake, introducing its cannabis infused edibles to new Jersey. These partnerships expand our product offerings to customers and create additional revenue streams, while increasing our manufacturing.
Abilities and efficiencies.
We are very encouraged by the customer reception of these brands and the demand they have generated as they entered new markets in short, it's working and we look forward to what's coming next while I'm proud of the progress. We made in 2023, we have so much more ahead of us our focus going forward is building a better business not just the bigger ones. We are working to enable our business from the <unk>.
This means empowering our team members who are closest to the customer we are shifting our approach to how we operate in retail how we make decisions and our facilities, how we solve for addressing customer needs and most importantly, how we interact with our biggest asset.
And I can tell you today, we are putting in the work to ensure this commitment is felt and seen throughout the entire business.
To put it bluntly, we are committed to doing a better job of operating within our four walls, our dedication to providing an elevated customer experience in both retail and wholesale has not changed and this requires a bit of agility on our part we want our customers to view us as a trusted partner that can help them make educated decisions about the products, we have to offer which will be increasingly important as well.
See the next waves of candidates normalization coming.
This next chapter for the candidates company requires a thoughtful approach to decision, making and entrusting the subject matter experts are people to play a greater role in our success and our gardens, where using the increased efficiency and quality of our facilities to produce some of the best products. We've ever made we're thrilled about what we've seen coming out of our cultivation and manufacturing facilities.
And we look forward to bringing these products to market through a reinvigorated approaches to wholesale and retail.
With purpose driven products that we know are in demand.
We have historically viewed wholesale has changed as we shift our approach. We're encouraged by the progress we're seeing in wholesale prices. Thanks in part to our higher quality products and a shift in product mix and we look forward to providing updates on our growth and market share in 2024.
In retail finding a balance between our loyal customer base that wants a more engaged and educational shopping experience, while not alienating the customer prefers a more hands off approach as our Northstar and our retail associates served as an incredible source of information, we can leverage to get closer to that objective by attracting retaining and empowering talent.
As passionate about their work the company and the plant will gain in that hyper local knowledge of customers' preferences and market dynamics using the insights we gain from retail we can re envisioned the way we commercialize our internal brands and approach the strategic commercial partnerships and deliver purpose driven products based on consumer demand.
We are partnering with flagship brands that fit our product portfolio and that customers will love. These collaborations can help us create an unmatched product offering that addresses the needs of every aspect of the market. We want the cannabis company to be the preferred platform for growth serving as a trusted partner and evolving the candidates market present and future.
The second half of last year forced us to reflect and then 2024, we are improving the way we do business execution has already begun we're evolving as a company and prioritizing long term strategic initiatives that will yield the best results for the business and our shareholders.
Like to say the trend has to be your friend and we are working to ensure that we future proof the organization and can successfully navigate the many phases of growth that still await this industry with that I will turn the call over to Derek to discuss our financials.
Thank you Jessie and good morning, everyone.
I will provide a summary of the key financial results for the fourth quarter and the full year discuss key trends in our market and comment on continuing initiatives to strengthen our company.
For the full year, we achieved $511 million in top line revenue flat with 2022.
Revenue in the fourth quarter was $128 4 million down slightly sequentially from Q3 and up 2% year over year.
We continue to see a decline in average basket size caused by ongoing pricing pressures.
Set by transaction volume growth over the prior quarter and the prior year.
Wholesale revenue increased 4% quarter over quarter, now representing 13% of total revenue in Q4.
For the full year wholesale revenue was 12% of total down from 14% in 2022.
We're actively working to recover and improve our wholesale part of the business as we've already outlined.
Adjusted gross profit in the fourth quarter was $44 million down from $50 million in the prior quarter and $47 million in Q4 of 2022.
Our adjusted gross margin of 34% in the fourth quarter was down from 39% in Q3 and 37% in the prior year.
Result of a deliberate inventory reduction strategy undertaken as we transitioned away from the <unk> transaction.
Our inventory reduction was achieved through higher discounting both through retail and wholesale channels and had the desired effect of increasing operating cash flow despite the lower margins.
We continue to experienced absorption accounting from underutilized facilities.
Five percentage points of gross margin impact due to the underutilization of our cultivation sites.
Increasing utilization remains a key opportunity to recapture gross margin in 2024.
Well materialize overnight.
We're already seeing some progress.
Adjusted EBITDA in Q4, with $12 5 million contributing to the full year total of $70 million.
Adjusted EBITDA down markedly quarter over quarter. Nevertheless, represented a 3% increase over the full year total in 2022.
The fourth quarter decline was primarily a result of clearing through aging and excess inventory as we've discussed temporarily depressing, both gross and EBITDA margins.
Concurrently we saw a strong improvement in cash from operations in the fourth quarter with $9 4 million generated in Q4 compared to $1 8 million achieved in Q3.
Prioritizing cash flow was a strategic initiative for us in 2023, achieving positive operating cash flow one quarter ahead of schedule and posting a large sequential increase in Q4.
During the fourth quarter, we did not open any additional retail stores and ended the year with 86 active locations.
We anticipate four new store openings in 2024, one in Maryland, one in New Jersey, and two in Virginia to reach a maximum license caps in each of these states.
During 2022 and through the second half of 2023, we announced a series of cost reduction initiatives, including the integration of the <unk> acquisition facility closures and the reduction of corporate overhead that we expect to generate a net $38 million in total annualized cost savings.
As one indicator of this progress in 2023, we achieved a 24% reduction in our corporate overhead expense compared to the prior year.
We anticipate a full year benefit of cost savings going into 2024, offset slightly by minimal investments to support our strategic initiatives and growing the wholesale business investing in technology and expanding our manufacturing capabilities.
Onto our liquidity.
We ended the year with $39 $3 million in total cash. This was achieved after paying down $30 6 million of senior debt in the fourth quarter $25 million to redeem the bulk of our 13% notes due may 2024, and $5 6 million to fully settle the convertible notes that mature in December of 2023.
Capital expenditures in the quarter and $1 7 million consistent with our Capex guidance.
For 2024, we expect a continuation of Capex that these manageable level in the range of $2 million to $3 million per quarter as we've already invested in the bulk of our more capital intensive infrastructure.
In 2023, we executed on a number of measures to strengthen our balance sheet.
During the year, we retired approximately $35 million of net debt.
Including the $30 million of senior notes in the fourth quarter, and a net $5 million to settle all but one of our remaining selling it.
In 2024, so far we've again reduced leverage through the exchange of $10 million about 6% convertible notes due 2025% equity and anticipate a further $15 million to exchange by the middle of this year consistent with the transaction agreement we announced in January.
Today, we announced the closing of our Utah divestitures at $6 5 million in gross proceeds and will continue to target initiatives to improve cash flow further delever the balance sheet and reduce interest expense.
I would like to underscore our key financial priorities.
They remain driving improvements in gross margin EBITDA and operating cash flow, while continuing to proactively manage our balance sheet and what remains a challenging market for the cannabis industry.
In the midterm, we are targeting to build to EBITDA margins above 20% sometime during 2025.
We don't expect the path to be linear, but the team remains focused on executing against that goal.
With that let me turn the call back to David for final comments.
David.
Thank you Derrick before we take questions I want to leave you with this make no mistake. We appreciate that there is a lot of work ahead of us and we relish the opportunity to capitalize on our strengths in 2024 and exited the year in a materially stronger financial condition I fully expect that this year will require persistent blocking and tackling to ensure we strengthen our foundation positioning.
Company to achieve its potential in the years ahead you'll.
You'll see us make the necessary changes to right. The ship so to speak after an argument 2023.
I have committed to the theme that this business will look very different by the end of 2024, and we are evaluating everything from our portfolio of assets the company culture and putting in the effort to make sure. We deliver we are committed to fostering a positive inclusive work environment to ensure we set the strategic direction aligned the organization and mobilize leadership, we're fortunate to have a great team that is committee.
To success and privilege to work alongside them.
Operator, please open the line for questions.
Thank you and if you'd like to ask a question. Please press star one one.
Your question has been answered and you'd like to remove yourself from the queue. Please press star one again.
First question comes from Aaron Grey with Alliance Global Partners. Your line is open.
Hi, good morning, and thank you very much through the questions here.
First question for me.
How much of an impact.
Could you guys have from some of the lower margin sales you mentioned.
Could you just quantify that maybe in terms of the margin impact and I can feel the inventory is better positioned today should we still expect some impact heading into the first quarter.
Or just some updates in terms of the actual impact from that inventory and where we can take in terms of the near term on the margins.
Yes. Good morning, Erinn. This is Derrick I'll take that.
The impact of the gross margin decline was taking our Q3 margin from 13, 9% down 34% in Q4.
All of that aside from the five percentage point overhang. We previously talked about an underutilized assets that is the impact of clearing out inventory at.
So the second part of your question, we're mostly through that.
Small amount left going into 2024, but that's mostly behind us.
And again this was referencing back to breaking from that transaction in Q3 took a couple of quarters to get through that whole data aged inventory.
Okay. Great. Thanks second question from me you guys talked a lot about wholesale strategy in your prepared remarks.
You've announced a number of newer expanded brand partnerships recently so talk.
Give us a little bit high level in terms of your thoughts on strategy with your own branded products versus third party.
And how youre looking to entrench yourself more in wholesale opportunities and some of the markets, where there's already existing players.
Either.
Blake, some others and increase your own shelf space or maybe just increasing the velocity. So maybe the overall strategy in terms of how you are looking to really expand their wholesale with some more detail. Thank you.
Hey, Aaron it's Jesse I'll take that so a couple of thoughts there I mean, we've spoken previously and continue to speak about the fact that we're we're obviously heavily invested in building out both an organization as well as systems and processes to support a.
A more focused effort in wholesale in general when we took a look at it at a high level, though we understood. There were a couple of things dramatically that we need to fix number one we need to continue continue to convert more of the existing capacity that we were utilizing into finished goods versus low margin bulk trades.
And then the second was obviously just increasing the throughput and utilization of <unk>.
The federal piece.
Sure expansion of our first party brands continuing to lean in and build those obviously is one path forward.
We also identified those third party partnerships that you mentioned as another opportunity to be an immediate shot in the arm with regards to that increased velocity in sales and I think so far we are incredibly excited about what we're seeing there.
That is all part again of a larger strategy of making sure that it's not just that we're increasing the top line of the wholesale business, but we're building a better wholesale business, it's ultimately going to contribute to the strategy for the organization moving forward and a big part of that story is.
Brand building and getting product into finished goods, creating more strategic relationships not only with msos, but also all accounts across the markets that we serve.
And making sure that those are ending up on shelf. So I think that that is the focus right now we continue to see advancement in results in that direction at the third party brands help us to do that quickly and so I think you'll continue to see that moving forward.
Okay, great. Thanks, I'll jump back in the queue.
Thank you.
Next question comes from Fredrik Gomez with HEB capital markets. Your line is open.
Hi, good morning, and thank you for taking my questions.
Just on the comment on.
The under utilization that you're having some of your facilities could you remind us about which states.
You have that.
The more material and then in terms of ramping that capacity.
As you look into 2024, where do you think that could happen faster, which states you see the most attractive opportunity here. Thank you.
Yes. So this is Eric let me start with canopy utilization.
We've mentioned this on previous calls.
The five percentage point overhanging gross margin from underutilized cultivation assets and Thats cultivation capacity that we built investment that we put.
Into a number of facilities around the country, where it's just a period cost until we ramp those facilities up.
The investment was made in anticipation of adult use coming.
Isn't yet fully materialized, so it's places like Pennsylvania.
Just like New York assets, the bulk of the facilities that are impacting that few others around the country. Because we continue to have capacity to be able to turn on and.
Use the expansion in wholesale and expansion in adult use.
Which we're hoping to.
Yet through at won't be immediately.
Taking that up there or at least signs in 2024 that overhang to come down.
Expect it to continue into quarters into the future.
This is David I would just I would just add that the first two that come to mind are New Jersey, and Pennsylvania, where we're actually we're adding we're adding capacity right now so we're putting more plants under lights.
Early in 2024.
Thank you Andy.
And in terms of your footprint expansion, you mentioned, new stores, Maryland, New Jersey, and Virginia, just any color on the cadence of these store openings this year.
So we're not going to give any guidance in terms of which Q theyre going to open up they're all under development. They will all be opened in 2024.
The one that's probably front and center for Us to get done is new Jersey give any opportunity there in that market to have the third door, but I think I've mentioned on previous calls we've mentioned here is they never easy to get the door open. So it is the top priority for us.
Thank you very much I'll hop back in the queue. Thanks.
Thank you. Our next question comes from Andrew Semple with excellent capital markets. Your line is open.
Hi, there. Good morning first question, how much did inventory liquidation actually contributed to operating cash flow in Q1, sorry Q4.
Yep. So the just to give you a scale the inventory reduced.
Quarter by about $6 million over the year by about $16 million. So that's the working through inventory thats, taking place with a with a significant reduction.
The adjustments that we made during Q3, we had some inventory write down provisions.
There's an element of the cash and mainly the inventory reduction numbers I think wood.
Would be best used to highlight how much that's come down.
Got it okay.
And then just wanted to go back to the guidance that was issued in November that Q4 results would look similar to Q3 and at that time you'd you'd also commented on inventory liquidation that would be occurring in Q4.
I'm just wondering what what changed since then.
With EBITDA down in the fourth quarter relative to the third.
Did you actually find that you have to be more aggressive on price started to move some of the older inventory than you would have previously thought or are there other factors that that were at play.
Yes, so the outlook that we were.
We're starting to in Q3 was focused on operating cash flow positivity, which we achieved in Q3 and that increased in Q4.
Our revenue is <unk> had was relatively flat between Q3, and Q4 down marginally unless other than we'd normally expect from a seasonal reduction.
So that the margin and EBITDA impact was all through reducing the inventory and essentially clearing at Abbott lower margins.
Revenue.
Pretty stable quarter over quarter cash focus is what we described in Q3 and that really was the focus to liquidate that inventory and get the cash in the door.
Got it thanks for taking my questions.
Thank you. Our next question comes from <unk> Kang with Canaccord Genuity. Your line is open.
Hi, Good morning, everyone and thank you for taking my question. This is.
Matt Bottomley.
I wanted to ask about the sequential uptick in SG&A costs. This quarter on August <unk> financial statements have been released yet so it's hard to see.
Kind of what's behind us, but we noticed that there is a significant uptick in SG&A costs. This quarter. So I wanted to ask is.
What kind of impact that this had on the sequentially lower adjusted EBITDA margin this quarter.
And I wanted to ask if this number also included any potential impairments.
Utah's until August you guys Might've said that's it thank you.
Yes. This is Eric I'll take that.
Good call out on SG&A. So they are all onetime items in Q4 that include the impairments that you've alluded to.
We will be filing our 10-K later today and you'll see the detail there.
That we had.
$18 million of write downs between goodwill and intangibles as well as the small fixed asset write downs and that's driving the increase quarter over quarter.
Core SG&A costs again, primarily corporate overhead.
On a downtick based on the restructuring that we've implemented and that over 20% decline year over year is really driving that core more recurring SG&A that youll see quarter by quarter.
Great. Thank you.
If you could just provide some color behind that.
Currently planning or have already implemented in the past to achieve this.
This is David I'll take that I think there is I think the asset base the portfolio that we have speak to the opportunity for margin enhancement as we continue to drive incremental throughput through those assets.
There's a number of au conversions coming down the pipeline for us as well, which will again drive further opportunity for increased increased utilization of our back of house canopy in manufacturing.
I think theres, a number of operational execution in front of us.
Even on the retail side, whether it's centralized purchasing and a number of other initiatives that will drive incremental incremental opportunity. So I think that I think there is plenty for us to do you want to go after given the asset base, we have and Thats why we wanted to basically communicate where we think we're heading in the NIM.
Sort of midterm.
Great. Thank you so much.
Thank you there are no further questions. This does conclude the question and answer session. Thank you for your participation. You may now disconnect everyone have a great day.
Okay.
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