Q1 2024 The Cannabist Co Holdings Inc Earnings Call
Okay.
Hello, and welcome to the cannabis company first quarter 'twenty 'twenty four earnings conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
Asked a question during this session you will need to press star one on your telephone.
You wouldn't hear automated message advising your hand is race.
To withdraw your question. Please press star one again.
I would now like to turn the call over to Asia Gilbert you may begin.
Thank you operator.
Good morning, and thank you for joining the candidates company first quarter 'twenty 'twenty four earnings conference call.
With me today is Chief Executive Officer, David Hart.
Didn't Jesse Shannon, Chief Financial Officer, Derek Watson, and senior Vice President of capital markets and Investor Relations Liane Evans.
Earlier. This morning, we issued a press release reporting our first quarter 2024 results occur.
Copy of this release is available on the investors section of our corporate website, where you will 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.
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, 2023, which has been filed with applicable regulatory authority.
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.
The candidates company consider certain non-GAAP measures to be meaningful indicators of the performance of its business in.
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 hard to get US started David.
Thank you Asia. Good morning, everyone and thank you for joining US today, we're pleased to discuss the results of the first quarter and more importantly share how our team is driving this business forward in 2024 and beyond.
As we outlined on our fourth quarter earnings call in mid March we clearly defined our mission for 2024.
To build a better company not just a bigger company to that end. We've established four key areas of focus first is enhancing the customer journey for existing medical and adult use customers today as.
As well as to the new customers of tomorrow as candidates transition to adult use some more of our markets.
Second is capturing supply chain efficiencies and sweating, the details cultivation and manufacturing assets that we've already invested in.
Actively working to leverage the underutilized capacity through wholesale growth and strategic partnerships with third party brands.
Third we will capitalize on the next chapter of Kansas evolution as adult use adoption leads to increasing Tam penetration new market segments and fourth we will continue to improve our capital structure to ensure our ability to grow responsibly over time.
I am pleased to report that we have made to continue to make meaningful progress on each of these initiatives. We are doing so from the ground up.
As I mentioned last quarter <unk> been actively meeting with our leadership across the retail cultivation and manufacturing parts of our business there.
Those who are on the frontline of our operations across the company has a clear line of sight to what we need to do what needs to be improved.
Some of their ideas are small some are large but collectively their transformation.
We are changing the structure of the organization to drive change as efficiently you're implementing the systems and software solutions to support greater transparency connectivity and generation of insights to help steer the business.
We're also making concerted efforts to enhance company culture as we engaged the team in this new chapter as a result, the organization is aligned empowered and excited to build a better business and our momentum is building.
As examples of our progress let me highlight a few key developments, we achieved in the first quarter, which we view as the green shoots indicative of early progress towards our goals rigor.
Regarding margins, we achieved a 500 basis point improvement in adjusted gross margin in Q1 compared to the fourth quarter of 2023 and improved adjusted EBITDA by more than 250 basis points over Q4. These improvements were driven by asset utilization improved margins at the retail level and early wins with brand partnerships on wholesale we saw something that improvement.
In wholesale margins as well as a decrease in the overhang from underutilized facilities that we have previously referenced.
We launched a new strategic brand partnerships in the quarter substantially broadening our wholesale product offering and increasing the mix of finished goods.
On balance sheet management, we completed a convertible debt offering in March in order to satisfy the remainder of our May 2020 for maturity.
The principal over 2025 maturities through an exchange, we continue to implement cost reduction initiatives at the corporate level.
We also completed the exit of a noncore market with the closing of the asset sale, Utah.
Continue to evaluate and underperforming assets in our portfolio.
As you can see we are making meaningful progress across the organization with the biggest initiatives improvement in our wholesale operation not only holding it in to run more efficiently, but also to run it more profitably and shifting our mix towards finished goods and by partnering with select brands to augment our product offering and.
And just a few minutes Jesse will provide more details on our wholesale and partnership efforts.
Before that however, I would like to address the recent reports regarding the potential decision by the DEA to recommend the rescheduling of candidates to schedule III from schedule one.
As is likely lost on no one listening to this call. We are witnessing in store change in policy at the federal level.
While the timeline remains uncertain the rescheduling of candidates as far reaching impacts on our industry undeniably from the positive.
With the reclassification to schedule III, and the resulting and a 280 <unk> entire industry will benefit from a more normal cost structure substantially lowering our cash tax costs.
Our capital and cash flow for debt reduction investment in growth I have to say, we look forward to shedding and disproportionate attachment Derrick.
Derek will address the company's outlook related to 280 <unk> momentarily.
At the state level, we continue to expect a number of our markets to flip to adult use such as Ohio, Delaware and Virginia, we are aggressively positioning ourselves for success. In these markets. We also continue to expand in states that have more recently transitioned to adobe's, such as New Jersey, Maryland, where we're growing both the wholesale business and our retail footprint.
So let me summarize where we are and where we're going.
First and foremost we have a strengthened strategic focus we are moving fast we're prioritizing profitability enhancing cash flow, reducing underutilized capacity strengthening our balance sheet and building a sustainable business. We will continue to capitalize on the strategic footprint with a specific focus on evaluating the potential of noncore and less profitable assets.
We are leaning into the most proper market and those that have future optionality to drive growth.
Supporting this effort is a key focus on improving operational efficiencies through better systems and processes, especially in retail and back office functions in turn this will drive better financial health through cost reductions and effective capital allocation and most importantly, we will continue to align our strategy with market demands focusing on higher margin products and partnerships to drive sustainable.
Shareholder value over the midterm.
We look forward to continuously implementing operational improvements and exiting 2024 and have materially improved position poised to compete more effectively.
With that I'll now turn the call over to Jesse to give you more color and some of the play by play Jesse.
Thanks, David as mentioned, we are driving to build a better business by empowering our team across the enterprise to implement change drive efficiencies improve customer service drive profitable growth and partner with the best brands to fully leverage our capabilities in both retail and wholesale I'd like to spend a few minutes zeroing in on some of our initiatives.
First and foremost our plan is to grow wholesale profitably.
No to be true and what we've begun to successfully pursue is that we have embedded potential for substantial margin expansion. We are exercising new discipline in wholesale differing deals where the economics do not work in our favor we turned away unprofitable business in Q1, which is evident in the 10 percentage point improvement in wholesale margins over the prior quarter, we are not going to pursue.
Top line at the expense of the bottom line and we have more margin to go after.
We're substantially increasing the mix of finished goods in our wholesale inventory using both first and third party brands at finished goods command higher pricing than bulk flower sales and by partnering with strong brands that are in demand, we not only moved the product, which we have grown reducing some of our underutilized capacity. We also expand our margins.
As you've seen over the past few months, we've announced partnerships with a number of successful brands. Our collaborations include partnering with Arrow brands in Virginia, West, Virginia, Delaware, and Pennsylvania, partnering with <unk> <unk> co in Massachusetts, and New Jersey, with Pennsylvania, Maryland, and New York, and Ohio Rolling out over the next few months.
Introducing flower by E D Parker and fixed markets, Arizona, California, Colorado, Delaware, Florida, and Virginia, and launching a new line of Edibles in Illinois, Massachusetts, New Jersey, and New York and we continue to expand our partnerships launched in the fourth quarter of 2023 with both old Pal and butter cake.
These third party partnerships are generating positive indicators for our wholesale and retail segments. The substantial mix shift towards finished goods along with these powerful brands is creating strong demand from our wholesale partners.
So not only are we seeing a shift in mix towards finished goods. We're also seeing new wholesale customers.
Partnerships are proving to be an incrementally positive tool in the toolkit for our wholesale teams in the markets, where they've launched and they're driving some incremental foot traffic for retail we're still in the very early innings, but the green shoots we are seeing today are leading indicator of what we expect to see in the remaining three quarters of this year as we expand our wholesale strategy improved retail experience.
Continue to reduce underutilized capacity and bring these powerful brands to new markets with that I'll turn the call over to Derek to discuss our financials.
Jessie and good morning, everyone.
I will provide a summary of the key financial results for the first quarter discuss trends in our market and comment on our continuing initiatives to strengthen the company.
For the first quarter, we achieved $122 6 million in revenue down four 5% sequentially.
Somewhat expected seasonal decrease over the fourth quarter of 2023.
As David and Jeff You had mentioned this was achieved with a more disciplined approach to margin improvement in both our wholesale and retail businesses.
We continued to see a decrease in retail average basket size, but to a lesser extent than the prior quarter.
Wholesale revenue decreased slightly to $15 4 million, representing 12, 5% of total revenue in the quarter.
However, consistent with our focus on margin improvement wholesale margin increased 10 percentage points over Q4, and we also saw our retail margins increased two percentage points.
This led to adjusted gross profit in the first quarter with $48 million up nearly 10% over the prior quarter and flat year over year.
Adjusted gross margin of 39% in Q1 represents a five percentage point improvement over the fourth quarter. When we implemented the deliberate inventory reduction strategy as we highlighted at that time.
In the first quarter, we recorded an adjustment of $5 4 million to revalue inventory specifically in the New York market that continues to be negatively impacted by the uncontrolled illicit market.
We continue to have an experienced and overhang from unabsorbed overhead and underutilized production facility.
As we've previously discussed and in the first quarter that overhang declined to a four two percentage point impact on gross margin.
The improvement in utilization with spread across multiple markets as our initiatives take hold with the largest contributors being in Ohio, Colorado and New Jersey.
We are encouraged by the improvement in gross margin achieved through price discipline beneficial changes in product mix and increased utilization and see this as an early indicators of solid progress.
Adjusted EBITDA in Q1 was $15 3 million, an increase of 22% sequentially with adjusted EBITDA margin improving to 12, 5% compared to nine 7% in the fourth quarter.
Cash from operations was a negative $6 2 million in part due to the timing of certain interest in other cash payments due in the first quarter and a $5 million build in gross inventory.
Prepare for the launch of our new first and third party products.
Capex in the quarter was a little under $1 million and we expect to continuation of Capex at these lower levels, averaging around $2 million to $3 million per quarter over the medium term and primarily supporting new store openings and enhancements to our manufacturing capabilities.
Maybe new stores were opened in Q1.
And we have 85 active retail locations as of today, having completed the sale of our Utah assets in the quarter.
We still have four new retail locations in development one.
In Maryland, one in New Jersey, and two in Virginia in order to reach our maximum license caps in each of these state.
And also preparing for the opening of additional stores in Ohio is that market transition to adult use.
We ended the first quarter with $45 million in cash boosted by $25 8 million private placement of convertible notes due March 2027, and which generated net cash proceeds of $14 8 million.
The primary use of cash proceeds will be to settle the remaining $13 2, million% to 13% notes maturing on may 14th 2024.
Pursuant to this transaction and the debt to equity transaction announced in January we also reduced our 2025 convertible note maturity by $15 million in the quarter.
The principal remaining on the 6% notes is now $59 $5 million with up to another $15 million potentially converting by the end of June subject to share price consideration.
Our actions to reduce overhead, including corporate reduction in the first quarter and we continue to assess opportunities to reduce overhead costs to more appropriately match the scale and scope of our operations.
We will continue to talk with initiatives to improve cash flow further delever, the balance sheet and reduce interest expense.
This may include further divesting of noncore or underperforming assets in the portfolio all of which are under review as we've mentioned.
Lastly, a comment on <unk> and the related tax impact.
Although the timing of federal rescheduling remains uncertain.
We previously stated that its $2 <unk>, which are no longer applying current annual tax liability decreased by around $30 million.
Separately, we are in the process of pursuing potential tax rates on amendments and refund claims associated with $2 <unk> related to prior tax years, and we'll provide further updates when they are available.
Again, I would like to underscore key financial priorities.
They remain driving improvements in gross margin EBITDA and operating cash flow, while proactively managing our balance sheet.
In the medium term, we continue to pursue adjusted EBITDA margins above 20% during 2025.
And as we've noted we do not expect the path to be linear.
The team remains focused on executing against these goals and we are encouraged by the Green shoots we've described during Q1.
With that let me turn the call back to David for final comments.
David.
Thank you Derek.
Before we take questions I want to reiterate that we are making material changes to our business. So we end this year in a much better position competitively and financially we will see more progress in the coming quarters. We were encouraged by the green shoots in Q1, which are continuing to grow in Q2 and look forward to taking your questions. Operator. Please open the line.
Thank you.
Ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone and then wait to hear your name announced to withdraw your question. Please press star one again please.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Scott Fortune with Roth Capital Partners. Your line is open.
Scott Thomas Fortune: Yes, good morning, and thank you for the questions.
Just wanted to dig in and provide a little more color. If you can on kind of the.
Around the under utilization here, you've made great progress.
From that standpoint, they just kind of want to get a sense, where you at overall from your utilization standpoint.
And then a follow on would be to Untack. The improved gross margins because of that but we can follow on after that but just focus a little bit on the utilization efforts, you've made and where you can continue to move forward with that.
Yeah.
Yes, Scott Good morning, this is derrick.
We'd outlined in the prepared remarks that the overhang from underutilized assets on gross margin is now down to four 2%.
It's down from around 5%.
Highlighted in previous quarters.
So we are as we said sweating the assets a little bit more we're increasing utilization and a number of locations.
We called out a few markets New Jersey.
That's growing in the wholesale market there is strong, Ohio is where I am.
Caring for adult use.
We are continuing to.
Scott Thomas Fortune: We reduced that overhang.
And as time goes on it's not going to go down to zero. There is always going to be some inefficiency in the supply chain.
That is a beneficial improvements as we're increasing volume.
Second of all your question on the growth.
Yes, I'd, probably go up kind of on the gross margins that you real significant improvement congratulation series 500 basis points, but just wanted to get a sense for.
It makes it a little bit coming from asset utilization that improves.
Four wall retail margins there.
Brand partnerships, if you can unpack that a little bit and just kind of.
Scott Thomas Fortune: Figure out let us know how much is coming from each of each of those initiatives that would be helpful.
Speaker Change: Yes, so I'll stop.
Then handover that Jesse here.
The mix between retail and wholesale.
We don't separately identified the margins on each but we did call out the wholesale margins had increased by 10 percentage points quarter over quarter retail margins and improved two percentage points quarter over quarter.
Speaker Change: You may recall in Q4, we were.
Selling a lot of inventory to clear out inventory levels. So they were lower margins at that point.
We are on a path to building margins, having discounting discipline and retail selling more finished goods and wholesale which are at higher margins as well as sweating those assets and reducing utilization that we covered in the first part.
Jesse anything you'd like to add.
I think look I think they're covered it well I would say in wholesale it really comes down to two things and that is disciplined with regards to the transactions that we're going to take place in and then obviously the significant shift in mix into finished goods. Both in the first and third party brands, which is a.
Speaker Change: Fundamental change in the business.
Which is part of the reason why we're going to continue to see the build a bear throughout the year, but the.
Immediate actions with regards to margin on the retail side I think we continue to see increased discipline with regards to discounting I think theres also some steps that have been taken and more to come with regards to.
Centralization and execution with regards to vendor relationships and best practices in buying across the enterprise again. These are these are all efforts that.
Continue to have opportunities to expand the impact, but we're obviously excited by what we're seeing in the first quarter.
Speaker Change: Great I appreciate the detail and then one last follow up for me just sort of focus on her own.
Ohio here, providing a little color there in the market, obviously, the timing could be coming up here mid summer for sales there.
Just kind of a comparable analog state there that you expect Ohio to kind of mimic is this more of like a Maryland.
There's very less medical patients in Ohio, the start but the potential obviously.
Anywhere from two five to four times bump up in sales just kind of a little more color on your positioning in Ohio, and how you see that market kind of converting enrolling out here for Ya.
Scott This is David I would say those numbers seem reasonable when we're looking at in the market that has converted that we've participated in Maryland sticks out as one that might be a good example.
Clear and we've heard from we've heard from investors, we heard from analysts what we need to get Ohio rates and we're laser focused on being prepared for day, one adult use.
So it is a top priority for us as an organization heading into <unk>.
As soon as we got clarity on the definitive timeline, but we are we are building and preparing anticipation of adult use we're very excited about it.
Thanks, I will jump back in the queue.
Thank you.
As a reminder, ladies and gentlemen that star one to ask the question.
Speaker Change: Please standby for our next question.
Our next question comes from the line of Aaron Grey with Alliance Global Partners. Your line is open.
Hi, good morning, and thank you for the questions.
And pulling out some of the profitability in the quarter I just wanted to double back on Ohio. So appreciate the color in terms of how you expect it to look in terms of overall market I'll talk more about how you're positioned right now specifically given.
Your inventory, there's obviously uncertainty maybe it starts.
Maybe it starts in the fall. So how flexible are you in terms of your current positioning to make sure youre well inventory to capitalize on the initial demand and higher asps that come with to start with an adult use market.
Yes, good morning, Eric This is Derek.
How would that initially so you're right there's always uncertainty over the timing of an adult use switch and balance between building inventory to be ready for that.
Derek: We do.
Did have underutilized assets in Ohio, So we were not fully utilized in the cultivation, but we've got a lot of space that we've got room to grow and we've been building inventory our inventory gross inventory did go up in the quarter.
In anticipation of that adult use coming on.
Derek: So with an improvement in Ohio is still some clarity needed and the regulations on exactly which products that would be able to use that we've got.
Good cultivation manufacturing assets, there and again have been building inventory in anticipation of that flip sometime it could be as early as mid June could be later.
Derek: We'll be ready both for the retail growth and also to sell into the wholesale market.
Okay, Great I appreciate that color second question from me just in terms on the wholesale.
Derek: Sounds like you've done some rationalizing in terms of channels or retailers are selling you're selling into there.
Speaker Change: But there's still work to be done it sounded like from what I heard from you Jessy.
Can you help us maybe quantify how much more there is to go in terms of that rationalization that net $15 million. It looks about in line with what Youre doing quarterly from the prior year. So it sounds like the new wins, you have had more than offset what you've kind of selling off so where do you stand kind of on the go forward how much more do you have to go in terms of rationalization of unprofitable channels.
Versus opportunities for additional growth. Thank you.
Yeah, Hey, Eric It's a great question I think from a rationalization point of view I think we took a lot of steps very quickly to make sure that that business is essentially sort of reset and what the complexion of it looks like as we go forward. There is obviously still room for improvement, but I think we made some some pretty big strides I think green shoots in the things that we're most excited about.
With regards to wholesale is not only the fundamental shifts into the finished goods the branded product both first and third party, which are obviously.
Speaker Change: Sure.
Speaker Change: Highly profitable compared to some of the prior executions that we had gone and built that business on but also the expansion of the customer base.
We've seen a significant expansion with regards to not only the net number of new customers, but also the percentage of revenue.
Speaker Change: From new customers versus legacy and large relationships that we historically had in that business.
It's an incredibly impactful change.
Speaker Change: In the wholesale program and one that I think as we continue to execute and continue to expand on is what will ultimately provide some of the best results moving forward. So we know what good looks like.
There is a lot of partners in our industry and ecosystem that do an excellent job at that so it's not like it's a unidentified sort of bogey that we're going after here.
That's an advantage for the team they understand what good execution looks like we've provided them with sort of the.
Frameworks in the lenses to look at these deals through and has put the systems in place to ensure that we are executing consistently. So now it's all about sticking to that game plan moving forward and continuing to expand the base of customers that we're selling into.
Okay. Great. Appreciate the color then I'll jump back in the queue.
Thank you.
Please standby for our next question.
Our next question comes from the line of Frank <unk> with ATV capital markets. Your line is open.
Hi, there this is brendan on for Fred Congrats on the results quarter on <unk>.
Just curious since you have such a broad national presence. So just wondering what youre seeing on the consumer behavior behavior side across the footprint and specifically if the average basket declined in the quarter. It was more from seasonality following the holidays.
Alex mixed with consumers trading down.
Yes, so I'll start on the average basket size, and then kind of as Jesse for Proto comments. So we did see.
On a blended average decrease in our basket size in Q1, which was down only slightly.
Speaker Change: And then down.
Less than it was in the previous quarter.
So there's certainly been some recovery.
I'd say, we've seen supply exiting the market and setting.
Sudden.
<unk>, which is helpful.
That.
Reduces the pressure on pricing.
But there's a strong consumer out there the number of transactions continues to build.
So overall, we're still optimistic about the outlook and particularly those markets that we are prepared for the adult use switch.
We're positioned for in a number of states, but maybe just if you can provide some protocol. That's there now thanks, Derek I think you I think you hit on it we have a broad footprint that covers a pretty wide spectrum of markets.
From sort of very early medical markets, where obviously, we see high basket sizes, all the way through an incredibly mature.
Adult use recreational markets like Colorado, or California from a retail environment, where we typically see higher frequency of transaction lower basket size.
I think we're encouraged by what we're seeing in those markets, where we continue to fight to take market share.
Discounting discipline I think all of those things lend to an offset of some of those compressions that historically, we may have seen especially seasonality wise and the basket size. So I think we're encouraged by what we see in a number of those markets more to come and more work to do but when youre operating across this broad like I said of our spectrum.
That that blends Kevin can sort of be.
Not a beta analysis, but we have to look at it on an individual market level.
Speaker Change: Awesome. Thank you for that and then just looking at New York, We'd love to get some additional color on the dynamics of that market and also some initial commentary on Virginia.
Sure. This is David on New York, I don't think Theres much change quarter over quarter for us, we continue to lean into and develop a wholesale business for the adult use side.
We have not opted the converts are Brooklyn dispensary to adult use at this time so for us the balance of the year is going to be focused on the wholesale opportunity.
I think we are reading what everybody else is reading about the incremental enforcement thats, taking place, which I think is constructive but that will take time.
Speaker Change: In Virginia, again, I think probably no change quarter over quarter, we love the market.
Speaker Change: And under underdeveloped medical program. So I think there's still a lot of opportunity for incremental Tam prior to adult use which I think everybody is looking towards early 2026, but at this time. It is a great market for US. We're excited to open two more doors continue to grow the patient base there.
Speaker Change: And the only other the only additional color I would add on Virginia is we've spoken to this before and I do think it's a point worth reiterating that is still a young medical program that is significantly under index as a percentage of population versus other more mature medical markets that we that we and others operate and so if we look at something like a Florida.
Speaker Change: Or a Pennsylvania, which is.
Speaker Change: Probably 5% and 4% respectively.
Speaker Change: Virginia at Best guess is probably somewhere around one and a quarter, maybe a little bit higher. So there is significant room for organic growth in that patient base that we continue to serve as we look forward to obviously what will be a incredibly transformative adult use recreational moment for that state.
Speaker Change: Awesome. Thank you for that I'll jump back in the queue. Thank you.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, im showing no further questions.
Speaker Change: That concludes today's conference call. Thank you for your participation you may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yes.