Q3 2024 The Cannabist Company Holdings Inc Earnings Call
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Speaker Change: Good day, and thank you for standing by and welcome to the cannabis Company third quarter 2024 earnings Conference call.
At this time all participants are in a listen only mode.
After the Speakers' presentation there'll be a question answer session to ask a question. During the session you will need to press star one on your telephone you walked in here an automated message advising your hand is faced.
So was there a question please press star one again.
And please be advised that today's conference is being recorded.
Speaker Change: I would now like to hand, the conference over to your first speaker today, B and even C.
Your Vice President of capital markets. Please go ahead.
Speaker Change: Good morning, and thank you for joining the candidates.
Speaker Change: Good morning, and thank you for joining the candidates company's third quarter 2024 earnings conference call with.
With me today are Chief Executive Officer, David Hart, President, Jesse Shannon and Chief Financial Officer, Derek Watson.
Earlier. This morning, we issued a press release reporting our third quarter 2024 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.
Speaker Change: Certain 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.
<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 31st 2023, and in our subsequent quarterly filings.
Speaker Change: 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.
Speaker Change: Also please note that on today's call, we will refer to certain non-GAAP financial measures such as EBITDA and adjusted EBITDA.
Speaker Change: These measures do not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies. The cannabis somebody consider certain non-GAAP measures to be meaningful indicators of the performance of its business. In addition to but not as a substitute for our GAAP results.
Speaker Change: Reconciliation of such non-GAAP financial measures to their directly comparable GAAP measure is included in our press release issued earlier today.
Speaker Change: With that I will turn the call over to David Heart to get US started David.
David Heart: Thank you Lee and thank you to everyone, who has joined us on the call today.
Speaker Change: On each of the previous earning calls since Jessie and I were appointed to lead the cannabis company in mid January you've heard as clearly outlined our objectives and the actions that we're taking to build a better performing business to create a sustainable economic model and to drive value for all of our stakeholders every time we.
We've made it very clear that this company will look materially different by the end of 2024, and we along with everyone. In the organization continues to work aggressively to make this happen.
Speaker Change: We remain hyper focused on driving increased profitability rationalizing our geographic footprint any corporate expense profile as well as proactively implementing the changes required to strengthen our balance sheet to adequately meet our debt obligations and to set the company up for sustained growth and profitability in 2025 and beyond.
Speaker Change: I am pleased to say that during the third quarter, we continued to make solid progress towards each of our initiatives and at this time I'd say, we are over halfway through the transformation of the company with our in destination coming into clear view each day.
Speaker Change: It is our expectation that over the next few quarters, we will have completely repositioned. The company, we will be leaner, we will be more agile and we will be profitable and we will retain scaled operations in many of the best cannabis markets in the country.
Speaker Change: During Q3 and thereafter, we completed a number of critical actions.
Speaker Change: The opportunistic sale of our assets and operations in Arizona and in Eastern Virginia, Toronto for total proceeds of $105 million.
Speaker Change: By selling one of our choosing licenses in Virginia and by exiting Arizona, We immediately saw a near term liquidity needs and simultaneously positioning the company to begin tackling its future debt maturity obligations.
Speaker Change: We retained a strong position in Virginia, where we have one additional dispensary to open in the Richmond area, while transforming our balance sheet.
Speaker Change: Did that and we continue to advance the divestiture of our Florida operations.
Speaker Change: In addition, as part of continuing to rationalize the overall footprint. We also made significant progress shuttering and divesting our D. C operations in October one.
Speaker Change: Our Boston location, which was underperforming relative to our Massachusetts portfolio.
Speaker Change: In Q4.
Speaker Change: We have now also implemented further operational improvements and additional cost cutting initiatives in both the front and back of house to drive further efficiencies accelerating decision, making and improve cash flow.
Speaker Change: We are bolstering our wholesale team and creating a more focused sales approach to our largest accounts and lastly, we will continue to evaluate the opportunity to further rationalize our geographic footprint exit underperforming locations make changes to our field leadership structure to better streamline and standardize operations and to capture incremental cost savings opportunities at the corporate level.
Speaker Change: I continue to be impressed by what our team has accomplished in very short order that said, we will remain mindful that our industry and our company is still faced certain challenges and so our coordinated and calculated efforts to drive change will continue in the days weeks months and quarters ahead.
Speaker Change: For our company our financial results reflect some temporary timing challenges as during Q3, we exited a portion of our higher margin, Virginia operations, while still working to close the disposition of our loss, making Florida operations. So that put some temporary pressure on the bottom line. Among other things has created a bit of noise in our Q3 results, which Derek will discuss in a few minutes.
Speaker Change: Across the industry operators are contending with the slow yet measurable progress towards rescheduling and the continued pressures on liquidity and the punitive to AE taxation model as well as very limited and expensive access to investment capital.
Speaker Change: That being said we have charted a clear course forward to reposition to cannabis company is a smaller but stronger and more agile company with scaled operations in many of the best and most promising markets in the U S.
Speaker Change: Upon completion of the processes to exit Florida in D. C. We will have a footprint of 12 states.
Speaker Change: We are making progress and we'll continue to make progress on our transformation plans, including additional success in building a better wholesale operation, which Jesse will take you through in just a moment.
Speaker Change: As we remove unprofitable and nonstrategic assets and implement our operational improvements the opportunity to drive incremental profitability is significant.
Speaker Change: We continue to target achieving a 20% adjusted EBITDA margin in 2025.
Speaker Change: We'll continue to make additional changes through the balance of 2024 as we remain focused on achieving that goal in 2025.
Speaker Change: Today after much effort in the first 10 months of 2024, we find ourselves at an inflection point on the path to building a sustainably profitable business.
Speaker Change: This year, we will have significantly streamlined our operations made enormous progress towards exiting underperforming markets enhanced our go to market strategy in both retail and wholesale partnered with amazing brands.
Speaker Change: Strengthening our balance sheet with fresh capital and reduce our overhead and operating costs.
Speaker Change: It's been accomplished much remains to be done, but again, we are over halfway there with the end goal squarely in our sites with that let me turn the call over to Jesse to drive a bit into our operational results and initiatives Jesse.
Jesse Shannon: Thanks, David as David mentioned over the past 10 months, we've been executing our plan to rationalize our geographic footprint root out inefficiencies protect our assortment of flower and finished goods implement process improvements at both retail and wholesale improve margins and cash flow and strengthen our presence in the best markets, particularly those that are <unk>.
Jesse Shannon: I was listening to adult use.
Jesse Shannon: We know we have additional opportunities to execute against where we can capture margin by improving operations. Our Q3 results reflect continued progress on our initiatives in particular I would point out that wholesale revenue increased 2% sequentially to $19 5 million and that is despite the impactful divestitures in Virginia, and Arizona, we continue to work toward.
Speaker Change: Improved pricing discounting and promotion across the organization and our brand architecture, we implemented further changes in our operations enhanced our wholesale and retail demand planning and undertook re formulations of our pre rolled product to enhance margins we.
Speaker Change: We saw stabilization in key markets, such as Colorado and in New Jersey, we are moving into the pricing maturity curve that we were expecting we have terrific manufacturing operations in Jersey, which leads to a better cost basis, and we are very much looking forward to opening our third dispensaries in the state which is expected to open doors around the end of this year, our top five markets by revenue and adjusted EBITDA.
Speaker Change: Once again, alphabetically, Colorado, Maryland, New Jersey, Ohio, and Virginia, with a higher demonstrating the largest increase in revenue and adjusted EBITDA quarter over quarter. Thanks to the launch of adult use we.
Speaker Change: We should note that New York was behind Ohio, with the second largest improvement in revenues sequentially as we are seeing progress in the wholesale market.
Speaker Change: One of the most exciting developments in the third quarter was the transition of the Ohio market to adult use recall that on our last earnings call I addressed returned from day, one of Au in Ohio, which was indeed electric that energy has continued and we've seen some strong results and encouraging trends.
Speaker Change: We have five great stores in Ohio and volumes on average nearly doubled we have had a huge influx of new customers, achieving a new customer rate nearly nine times greater than what it was prior to the transition of adult use.
Speaker Change: We are supporting our surgeon customers and volume with a 50% increase in production throughput in Ohio. This was driven by increased utilization and preparation for launch as well as improved cultivation with more biomass and a higher potency rate, we were well prepared to serve all of the customers coming into our stores. This has led to substantial increases.
Speaker Change: Sale of both first and third party products as well as substantial increases in both flower and manufactured items. We've also experienced a positive mix shift on flower towards our own production.
Speaker Change: I want to note that Ohio is still in the process of implementing their final rules once implemented the caps on the quantity of flower sold per customer per day were more than double and we will have a greater product assortment available, including combustibles. We're also working on additional store openings. The first of which we expect to see in first half 2025.
Speaker Change: A lot of positive momentum in Ohio, and I'd like to take a moment here to thank the incredible Ohio team for all of their hard work to prepare for and execute the transition of adult use which was our best transition as a company to date.
Speaker Change: Each market transitioning to adult use we get better and we look forward to Delaware converting in 2025 as well as longer term conversion opportunities in several of our other markets, namely, Virginia and Pennsylvania.
Speaker Change: As we look out over the next few quarters, we will continue to aggressively position ourselves with the best footprint in the best markets with the best products and brand assortment and continue to work towards the best execution to build a strong and sustainable business with that let me now turn the call over to Eric to cover the financial results in more detail Barrick.
Eric: Thank you Jessie and good morning, everyone.
Barrick: A summary of the key financial results for the third quarter discuss trends in our market and comment on our continuing initiatives to strengthen the balance sheet and improved profitability.
Eric: For the third quarter, we achieved a $115 million in revenue down 8% from the second quarter, primarily as a result of the sale of Eastern Virginia, and Arizona businesses, which closed in mid August.
Speaker Change: As David mentioned, the divestitures and other related actions have created some noise in our reported results.
Speaker Change: However, excluding the impact of divestitures in both Q2 and Q3 revenue would have essentially been flat quarter over quarter.
Speaker Change: We saw a slight decline in gross margin in the quarter down 75 basis points to 38, 2%.
Speaker Change: Wholesale increased 2% over the second quarter as Jesse mentioned and represented 17% of total revenue up from 15% of total revenue in Q2 and 12, 5% in Q1.
Speaker Change: We saw a slight improvement and the ongoing overhang from Unabsorbed overhead and underutilized production capacity now representing a four one percentage point impact on gross margin down from the five percentage point impact we experienced during 2023.
Speaker Change: We expect that to continue.
Speaker Change: Gradually declining, particularly as we exit the Florida market and additional capacity is utilized in other market such as New York.
Speaker Change: In mid June, we announced incremental corporate restructuring actions targeting a further $10 million in annualized cost savings and we are targeting a further $5 million in cost savings during Q4.
Speaker Change: Adjusted EBITDA in Q3 with $14 million down from $17 5 million in Q2, with an adjusted EBITDA margin of 13% compared to 14% in the second quarter.
Speaker Change: The sequential contraction in adjusted EBITDA and adjusted EBITDA margin is also a result of the sale of our higher margin businesses in Virginia and Arizona.
Speaker Change: As we've disclosed our Florida operations have been loss, making and continue to be a drag on adjusted EBITDA in Q3, while pending completion of a market exit that.
Speaker Change: Cash from operations was negative $18 million compared to negative $3 million in the second quarter and negative $6 million in the first quarter.
Speaker Change: This was the result of catching up on previously deferred payment and several one time items related to divestitures and our ongoing restructuring efforts to transform the company.
Speaker Change: Capex in the quarter was $1 5 million primarily to support retail locations that are in development, including our third New Jersey store that is scheduled to open around year end.
Speaker Change: As before we continue to expect capex over the longer term to average around $2 million to $3 million, a quarter, primarily supporting new store openings and enhancements to our manufacturing capabilities.
Speaker Change: We had 73 active retail locations at the end of the quarter after the sale of assets in Arizona and Eastern Virginia.
Speaker Change: One is the closure of our Boston location.
Speaker Change: We continue to have new retail locations in development, one in New Jersey, one in Maryland, one in Virginia, and now three in Ohio in order to reach our maximum license caps in each of these.
Speaker Change: We ended the third quarter with $71 5 million in cash after making an interest payment on our nine 5% notes due 2020 with the balance up from $22 million at the end of Q2.
Speaker Change: Share of net cash proceeds received in the quarter relating to the Arizona in Eastern Virginia divestiture was $31 million with future proceeds to be received in the form of monthly payment.
Speaker Change: This excludes our share of equity in Toronto, which had a mark to market value of $33 million as of September 30th.
Speaker Change: Lastly, a comment on <unk> and the related tax impact.
Speaker Change: Despite progress to date, the timing of federal rescheduling remains uncertain.
Speaker Change: As we've previously disclosed is $2 <unk> with a no longer apply current annual income tax liability would be expected to decrease by around $70 million.
Speaker Change: In mid October we submitted an amended tax return and refund claims associated with $2 <unk> for our 2020 tax year to December $5 million.
Speaker Change: This will be fully reserved for.
Speaker Change: Year end financial statements and we will continue to assess the benefits of filing additional amended tax return later taxis.
Speaker Change: As David and Jeff you had highlighted our key financial priorities remain rationalizing our operational footprint executing on improvements in both gross and EBITDA margin and driving operating cash flow to support proactive management of our balance sheet.
Speaker Change: We continue to pursue adjusted EBITDA margins above 20% over the longer term with our stated target of sometime during 2025.
Speaker Change: With that I'll turn the call back to David for final comment.
Speaker Change: Good.
David: Thank you Derek.
Speaker Change: Before we take questions I want to touch upon the news we shared this morning as we've discussed we are in the midst of simplifying our business to focus on core markets that will drive profitability and help to create a sustained economic model going forward as part of that process. We are exiting loss, making operations in Florida. We're pleased to have closed on the sale of 14 retail locations in two cultivation facility.
Speaker Change: In Florida, which we announced this morning, and we look forward to closing the transactions for one additional facility and the remaining license in the near future.
Speaker Change: As we've emphasized there is more to do and we will continue to transform this company and position ourselves to succeed in 2025 and beyond we will now take your questions. Operator. Please open the line.
Speaker Change: Thank you so much at this time, we will conduct a question and answer session.
Speaker Change: As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced so was there a question. Please press star one again.
Speaker Change: Standby, while we compile the Q&A roster.
Speaker Change: Your first question comes from the line of Aaron Grey of AGP. Your line is now open.
Aaron Grey: Hi, good morning, and thank you very much for the question.
Aaron Grey: So first question for me Derek I think you did allude to a little bit, but just in terms of <unk>.
Aaron Grey: Pro forma basis, how the company fared in the quarter.
Aaron Grey: Maybe you can provide.
Aaron Grey: No trend wise, how you did <unk> versus <unk>, if you account for all the divestitures or just how much of an impact the divestitures had on it. So we can get a better sense of how we come into fourth Q I think that kind of would be appreciate it couldnt can help later in that cost guidance now thank you.
Speaker Change: Eric would you like to take that.
Speaker Change: Yes happy to.
Aaron Grey: Morning, Erinn in fact question Youre right, we did in the prepared remarks.
Aaron Grey: Comment on the pro forma impact of Q2 to Q3, so essentially without the impact of those divestitures.
Aaron Grey: NII in the quarter, our revenue would have been flat quarter over quarter.
Aaron Grey: In terms of the.
Aaron Grey: Pro forma go forward, obviously Q4.
Aaron Grey: We will have the impact.
Aaron Grey: Full quarter's impact of those divestitures being out and as David has just mentioned we will have the impact of the Florida divestiture also out in Q4, so far.
Aaron Grey: Fast forward to the pro forma impact going forward, we're not yet ready to provide guidance on that but obviously a lot of noise in Q3, we've tried to highlight.
Aaron Grey: And once we've completed the process of the Florida divestitures, I think being a better position to provide pro forma going forward.
Speaker Change: Okay, great. Thanks, and then just quickly could you offer any color on the on the EBITDA side sales go ahead, sorry, I should have clarified the first part but for EBITDA did you comment on that.
Speaker Change: We did not but again a lot of noise in the quarter.
Speaker Change: Ethan Virginia high margin business, Arizona as well.
Speaker Change: Again, we would still.
Speaker Change: Working through the lock, making Florida operations in the quarter and as we've mentioned also that additional cost cutting is being implemented in Q4. So again a lot of noise in both quarters once with through completion of those will be in a better position to provide an ongoing pro forma Cui.
Speaker Change: Okay, great. Thanks, I appreciate the color there.
Speaker Change: And then on Ohio, you guys offer some commentary then.
Speaker Change: Being a highlight for the quarter.
Speaker Change: First on stakeholder it seemed like it was.
Speaker Change: Not as much of a lift there somewhat hoped.
Speaker Change: Obviously, you didn't have access to some of the marketing and form factors. So just any expectation in terms of the Ohio market going forward.
Speaker Change: Might expect adult use regulation.
Speaker Change: And also maybe on the broader pricing environment to just given it is the neighboring state of Michigan, where does that lower pricing. There. So how do you think those dynamics have impacted Dolby slots, which could potentially provide upside down the road. Thank you.
Speaker Change: Okay.
Speaker Change: Jesse you want to take that one.
Speaker Change: Yeah happy to Hey.
Jesse Shannon: Erin So look in Ohio, I think we were on the conservative side from the beginning with regards to what our expectations were for that lift I think we were out there publicly saying that we expect to have around it could be around that two times and thats, essentially more or less where things have fallen in for us.
Jesse Shannon: We've been I think RAF impacted.
Jesse Shannon: Than others based on just the location of the stores right for just the geographic footprint of our stores that are currently operating having.
Speaker Change: Having less of an impact on our border stores are.
Speaker Change: More in the West Virginia range than the Michigan range. So I think that's right.
Speaker Change: Our ability to control some level of pricing overall, we're excited by what we see in Ohio, I still think it's a good market that's heading towards great to your point as we see the introduction of the full adult use regs.
Speaker Change: It's very difficult to.
Speaker Change: Effectively operate and an adult use market when you can't really engage with their consumers miamisburg advertising rags and the loosening of those of those regs that engagement. So we're excited to be able to start to communicate to be able to start to drive volume and campaigns like we do in other markets and we're also.
Speaker Change: Waiting for those rates to be able to open up the Olympics for consumers right daily limits coming up with regards to their purchases what they can buy them and offer the introduction of additional form factors and combustible. So overall good market that we feel confident heading towards great.
Speaker Change: Okay, great tier of the land jump back in the queue.
Speaker Change: Thank you so much and our next question comes from the line of Yoann <unk> of Canaccord Genuity. Your line is now open.
Speaker Change: Hi, Good morning. This is John King on behalf of Matt Bottomley. Thank you for the question.
Speaker Change: My first one on just my first question is on the cash flow from operations negative $18 million this quarter.
Speaker Change: I think you alluded to some of the puts and takes that occurred throughout the period.
Speaker Change: <unk> contributed to the sequential downswing.
Speaker Change: Could you provide maybe some additional granularity on the events that occurred that led today. Thank you.
Speaker Change: Yes.
Speaker Change: Matt.
Speaker Change: Yes, Thanks Derik.
Matt: So, yes, 18 million negative cash from operations relative to a $3 million negative.
Speaker Change: Q2 and in Q1.
Speaker Change: So that there is a noise in the quarter with the impact of the divestiture.
Speaker Change: Some other onetime items related to the $10 million restructuring.
Speaker Change: Executed on earlier in the year.
Speaker Change: Still ongoing payments associated with that as well.
Speaker Change: And the other comment I'd make is that with some catch up on some deferred payments in previous quarters.
Speaker Change: I think that the.
Speaker Change: <unk>.
Speaker Change: Growth in our host wholesale, which we didn't necessarily call out we've got sequential growth in our wholesale business.
Speaker Change: Not uncommon in the industry as we are increasing our revenue quarter over quarter as that becomes a bigger component of our overall revenue. We're obviously not collecting all of that cash that also contribute to the negative cash from operations because we're in a high growth mode on our receivables balance it doesn't all get collected in the quarter.
Speaker Change: Again, a lot of components as part of that.
Speaker Change: Driving that amount in the quarter as well as the large interest payment that we make on our 'twenty six notes that the six monthly payment.
Speaker Change: Factored into the cash from operations.
Speaker Change: We're fully expecting that will come down in the fourth quarter.
Speaker Change: Based on timing of those one time items and interest payments and some of those other factors we've mentioned.
Speaker Change: Alright, that's very helpful. Thank you.
Speaker Change: And just on my second one here is obviously this morning, you guys announced.
Speaker Change: Completion of the Divesture 14, dispensaries in Florida.
Speaker Change: And obviously you previously you guys have alluded that you guys are looking to sell the production facilities, there and a large chunk of the consideration will come from Scott <unk> auction. So just wanted to ask how youre thinking about your capital allocation plans post proceeding now consideration going forward.
Speaker Change: Would it be more weighted towards some of the growth initiatives that you guys have planned or would it be towards de levering the balance sheet. Thank you.
Speaker Change: Maybe I'll start and then I'll hand, it over to you Eric Great question, we continue to be focused on putting cash under the balance sheet and delivering.
Speaker Change: Both the $24 25, we've outlined I think the Capex plans going forward are very light I think we said $2 million to $3 million per quarter. So we've spent a lot of the required capex for the great opportunity that we see in front of us and it's really about putting cash on the balance sheet and preparing for continuing to delever, but I'll, let you weigh in as well.
Speaker Change: Yes.
Speaker Change: Yes, thank you and completely hey, great.
Speaker Change: We've stated for a long time that we're looking to Delever the company and obviously cash proceeds from divestitures that kind of support that.
Speaker Change: That will be the primary use of it.
Speaker Change: And the capital deployment.
Speaker Change: But there's also some growth initiatives that we've got the new stores.
Speaker Change: That are opening that we mentioned at the first of which will be new Jersey around the end of the year, We've got the new Ohio stores that are.
Speaker Change: Opening.
Speaker Change: And.
Speaker Change: The Ohio regulations as they evolve there'll be different form factors that we will invest money in manufacturing.
Speaker Change: And in other markets as well.
Speaker Change: Capital deployment against the first comment Delevering as the primary objective with the use of use of funds.
Speaker Change: That's great color.
Speaker Change: Also on the line.
Speaker Change: Thank you so much.
Speaker Change: There are no further questions at this time and this concludes today's conference call. Thank you. So much for participating you may now disconnect have a great day.
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