Q1 2025 The Cannabist Co Holdings Inc Earnings Call
Good day, and thank you for standing by. Welcome to the Cannabist Company, 1st quarter, 2025 earnings conference call. At this time, all participants are in a listen-only mode.
To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today. Please go ahead.
Good morning, and thank you for joining the Cannabist Company's first quarter, 2025 Earning Conference Call.
Speaker Change: With me today are Chief Executive Officer David Hart, President Jesse Channon, and Chief Financial Officer Derek Watson
Earlier this morning, we issued a press release reporting our results.
Speaker Change: The copy of this release is available on the Investor's 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 made today regarding future expectations, plans, and prospects for the company constitute forward-looking statements within the meeting of applicable Canadian and U.S. Security's laws.
Speaker Change: Actual results may differ materially from those indicated by such four-looking statements as a result of various important factors which we disclose in more detail in the risk factors section of our annual form 10K for the year ended December 31, 2024, and in our subsequent
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.
Speaker Change: While we may update any such forward-looking statements in the future, we specifically display 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 GAF and may not be comparable to similar measures presented by other companies.
Speaker Change: considers certain non-get measures to be meaningful indicators of the performance of its business in addition to but not as a substitute for our gap results.
Speaker Change: A reconciliation of such non-GAAP financial measures to their nearest comparable gap measure is included in our press release issue earlier today.
Speaker Change: With that, I will turn the call over to David Hart to get us started. David?
David Hart: Thank you, Lee, and thank you to everyone who has joined us on the call today. We wanted to begin with an update on the pending debt restructuring transaction that we announced on February 27th.
David Hart: The company was pleased to announce last week that holders of the company's senior notes voted to approve the arrangement that the special meeting of senior note holders held on April 29th.
David Hart: The Arrangement Resolution, which required the approval of at least 66 and 2-thirds of the votes cast by the senior note holders present in person or by proxy at the meeting, was approved by over 75% of the votes cast.
David Hart: The principal remaining step in order to advance the transaction is to obtain court approval for the transaction in Canada.
David Hart: Court proceedings are scheduled for later this month to consider our approval requests and debt holder objections that have been raised.
David Hart: We will provide updates as developments warrant as the process moves forward.
David Hart: Given the current financial position of the company relative to the upcoming maturity of $59.5 million of 6% senior secured notes due next month on June 29th, 2025, it is essential for the company for the debt restructuring transaction to be completed.
David Hart: With respect to footprint optimization, we've continued to make progress. As discussed on earlier calls over the last 12 to 18 months, we have divested and exited from many underperforming or sub-scale markets, including Missouri, Utah, and Puerto Rico. We have now completed that process for Washington DC as well
David Hart: In Florida, where we divested our operations last November , we also recently closed on the sale of our remaining license for growth proceeds of $5 million and are currently under contract to sell our loan remaining asset in Florida, the cultivation facility.
David Hart: Following on the sale of one retail location in California last quarter, we continue to advance our exit from the California market on a facility by a facility basis.
David Hart: with contracts having been recently signed to that several more facilities.
David Hart: We're also currently in the process of divesting our business in the state of Illinois, which consists of two dispensaries in a cultivation facility.
David Hart: Once we complete the Florida California and Illinois market exits, the cannabis company will be active in 10 markets down from as many as 18 markets.
David Hart: Notably, of those ten markets, three of them, Delaware, Pennsylvania and Virginia, present future opportunities for growth upon transition to adult use.
Speaker Change: From an operating perspective, our sector is battling pervasive and persistent headwinds.
Speaker Change: There is increasing urgency around the pace of change as several regulation remains unresolved. The liquidity is tight for most and receivables are aging. The efforts requires offset those headwinds, meaning we all have to work even harder to simplify and reduce costs in the business.
Speaker Change: I'm grateful to our entire team for their dedication and for continuing to push forward in a challenging environment. As Derek will discuss in more detail a little later, we made progress in expanding both Adjusted Gross Margin and Adjusted Need a Dom Margin during the first quarter. We remain hyper focused on controlling when we can control.
Speaker Change: Thanks, David. Many of you may recall that I concluded my remarks last quarter by saying that we would continue to focus relentlessly on positioning ourselves with the most optimal footprint, the right products and brand assortment, and that we expect further optimization and efficiencies to materialize in 2025.
Speaker Change: The mantra continues to be simplified and optimized. As David mentioned in his comments that it's precisely where our energies are being applied and we have continued to make progress despite headwinds.
Speaker Change: In Q1, our top five markets by revenue and EBITDA in alphabetical order were Colorado, Maryland, New Jersey, Ohio, and Virginia and a seasonally down quarter overall we saw growth in the New Jersey market having opened our third dispensary on December 31st last year.
Speaker Change: During the quarter, we completed the exit of the Washington DC market, sold one dispensary in California and closed three underperforming locations in Colorado, ending the quarter with 55 operational retail locations compared to 59 at the end of Q4.
Speaker Change: On December 31st of last year, we opened our third vocation in New Jersey where we began adult use sales last month. With the grand opening celebration held on April 29th, we currently have three stores in development in Ohio and one in Virginia which are expected to open during 2025.
Speaker Change: In the first quarter we launched the Dremt brand in Massachusetts, New Jersey, and Virginia, adding to the initial success of Dremt in Maryland. Dremt has been a winning story for our House of Brands.
Speaker Change: with the product jumping to be the top selling sleep ski within our Maryland stores and wholesale distribution, including rapidly in New Jersey. We are working to expand to new markets in the near future. We also launched seed and strain in Maryland and the brand is now available in all of our operating markets.
Speaker Change: As for our partner brands, Old Powell continues to show strong brand performance in our Colorado Maryland New Jersey and Virginia markets. During Q1 revenue from Old Powell increased 20% sequentially.
Speaker Change: Our efforts to methodically rationalize our skews and pricing architecture continue across all of our markets.
Speaker Change: We are sunfitting low margin and low velocity skews and shifting biomass from discontinued brands into some of our best performing brands as we look to optimize on a newly simplified platform.
Speaker Change: On the wholesale side of the business, pricing pressures continue in a number of markets and we are aggressively but thoughtfully investing of products as need be, which impacted our wholesale margins in the quarter, improve margins of the retail side or helping to make up the shortfall and Derek will discuss this more in just a moment.
Speaker Change: I'll wrap up my comments by taking a moment to echo David's comments and express my profound thanks to the entire cannabis team for their hard-fought efforts to reposition our company. Now let me turn the call over to Derek to dive into the results. Derek?
Thank you, Jathy, and good morning everyone.
Derek Watson: I'll provide a summary of the key financial results for the first quarter of 2025, the status of our ongoing balance sheet restructuring and comment on our continuing efforts to improve profitability and cash flow.
Derek Watson: For the first quarter, we achieved $87 million in revenue, a decrease of 9% from the fourth quarter, in part due to the closure of three locations in Colorado and the sale of one location in California, but also due to the challenging environment and our underlying operations.
Derek Watson: The comparison to Q4 is also impacted by the partial contribution from Florida operations in Q4, without having closed on the sale of 14 stores in November of 2024.
Derek Watson: We ended the first quarter with 55 active retail locations compared to 59 at the end of Q4.
Derek Watson: The Judged Gross margin in the first quarter was 36% up 50 basis points over the fourth quarter [inaudible]
Derek Watson: I'd you have to leave a dollar and Q1 with 7.1 million down from 8.3 million in Q4.
Derek Watson: A jafted EBITDA margin, however, increased more than 200 basis points sequentially to 9.5% for the quarter, the sign of slow but steady improvement
Derek Watson: As we continue to reference ongoing divestitures creates the noise in our reported results as we're actively reducing the asset base.
Derek Watson: For an apple to apple comparison, we should discuss the pro forma results of the 11 remaining markets the quarter end as we've exited Washington DC and have filled our license in Florida.
Derek Watson: For those 11 recurring markets, we saw Adjusted EBITDA margin of 9.8% in the first quarter, a slight improvement over the reported quarterly results, and consistent with the Q424 equivalent pro-former Adjusted EBITDA margin across those same 11 markets.
Derek Watson: In the first quarter, wholesale revenue increased 3.5% sequentially to 16 million. However, we also saw another sequential decline in wholesale gross margin.
Derek Watson: This was offset by an increase in the retail gross margin, which was up 180 basis points over the fourth quarter.
Derek Watson: Also, revenue represented 18% of total revenue in the quarter, and pasted 16% in Q4 and 17% in Q3.
Derek Watson: The overhang from unabsorbed overhead in underutilized production facilities remained flat at around a four percentage point impact on gross margin, down from the five percentage point impact we experienced during 2023.
Derek Watson: With the smaller geographic footprint, we are continuing to simplify the business and reduce cost.
Derek Watson: Through several rounds of corporate restructuring, we achieved $23 million in annualized cost savings during 2024, and we're enacting further measures in 2025 to take more cost out of the system due to our ongoing footprint optimization and overall business simplification.
Derek Watson: In the first quarter, operating cash flow with negative 15.4 million and free cash flow negative 14.7 million both figures including a semi annual interest payment on senior debt at around $9 million.
Derek Watson: CapEx in the quarter was $2 million, as we continue to expect CapEx over the longer term to average around $2 to $3 million per quarter, primarily supporting new store opening and enhancements to our manufacturing capabilities.
Derek Watson: We ended the first quarter with 18.9 million in cash, down from 33.6 million at the end of Q4.
Derek Watson: As we've discussed, managing our liquidity remains a priority, particularly given the challenging operating environment and ongoing divestiture proceeds have been supporting the operating cash needs of the business.
David Hart: As David mentioned earlier, the anticipated completion of our debt restructuring is key to extending our debt maturities and bringing all of our senior debt instruments into a single class to know sooner than December of 2028.
David Hart: Going forward, we expect to continue noise in our reported results until the remaining divestitures in Florida, California, and Illinois are complete, and the momentum we're working on in the underlying operations fully take hold.
David Hart: Improvements in results are also subject to the timing of certain regulatory outcomes, such as adult Eason Delaware, Virginia and Pennsylvania, and the opening of new locations in Ohio and Virginia.
David Hart: As such, for Q2, we're anticipating a mid-to-high single-digit percent decline in revenue sequentially.
David Hart: With that, I'll turn the call back to David for final comment.
David.
David Hart: Thank you, Derek. We'll now take your questions. Operator, please open the line.
Speaker Change: Thank you. At this time, we will conduct the question and answer session. As a reminder to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster.
Speaker Change: First question comes from the line of Aaron Grey with Alliance Global Partners. Aaron, go ahead your line is open.
Aaron Gray: Hi, good morning. Thanks for the questions and thanks for some of the updates, you know, regarding some of the investors in that process. You know, my first question.
Speaker Change: I want to talk about some of the wholesale strategy there's a lot of puts and takes that you provided there So any update maybe you can provide in terms of the best ways you're seeing to build out you know that retail strategy at third parties
Speaker Change: I know it's not like you're doing some skewer firemen, I think Jesse gets some commentary on your prepared remarks, old pal seems to be doing well up 20% sequentially, so just kind of curious in terms of how that progress is going and then how you're also certainly in that back to your harvest cycles and those plants, thank you.
David Hart: Hey, Aaron, this is David. Thanks for the question. I'll let Jesse step in here to answer that one.
Aaron, good morning, Tom.
Jesse Channon: So, a couple of quick points there. One, as you highlighted, we do continue to see success with the third party brand that was launched both from the performance in our own retail stores as well as obviously how they're pushing through wholesale. We highlighted old pal, but obviously our partnerships with reverie and others continue to be strong and like what we're seeing out of the performance there.
David Hart: From a holistic point of view, one of the things that we referenced was really...
David Hart: getting significantly more simplified with regards to the skewer sortment and the products that are ultimately being manufactured and made throughout the supply chain.
David Hart: It's a huge effort that's gone on over the last couple of months and we're excited by what we're seeing from early progress.
David Hart: What we're ultimately doing is trying to leverage a more data-driven approach to making sure that we're making the right...
David Hart: products in the right sort of scale and leveraging the gardens effectively in order to create the best velocity and wholesale and also better margin. So as we continue to push through some of the older product, some of the legacy brand architectures and skews, I think we'll continue to see some of the pressure that we've reported in wholesale overall on those executions, but ultimately we're working our way through to a more simplified portfolio we owe.
David Hart: in partnership with our third-party brand partners that we think will increase the velocity and ultimately increase the size of the wholesale business.
The Cannabist Company. The Cannabist Company.
Speaker Change: I appreciate that color there. Regarding potential catalyst, adult use conversion and starts Delaware.
Speaker Change: Continue to see some delays in terms of the start there. It looks to see some slight line of sights and sales beginning, so can you provide maybe any color in terms of when you're expecting for a start date, how you're looking at the opportunities there, any changes you're making to the ramp up of inventory otherwise to position yourself well for the Salvadori sales and Delaware, thanks.
. . . . . . . .
David Hart: Aaron, this is David. We continue to be positioned for the Adult Use Conversion in Delaware.
Speaker Change: We've obviously gone through a number of market adult use conversions, so this one feels very similar to others with respect at timing, you know, I think there's been some progress in this data Delaware on a few technical fronts and on the human capital front where I think they're bringing it to mission or so I think there's
Speaker Change: There is positive momentum in the state of Delaware, but I still think the specific timing is not yet clear. We clearly think it's going to be a 2025 opportunity. The question is, you know, how early in 2025 we remain ready to go as soon as they give us to go ahead. So we're we're operationally ready to go. We're we're we're we're we're we're we're
Speaker Change: Okay, great. Appreciate that, David. Last question for me if I could, just in terms of a cash flow and I see the EBITDA improvement in the quarter. Just if you can give some color in terms of maybe some of the working capital changes, I know it looks like an operating activity was down around the cash flow. So just how should best think about the EBITDA improvements translating to cash flow improvements in the near term? Thank you.
The Cannabist Company
Do you have the morning hours?
Aaron Gray: Yeah, sure. So, yeah, we've got a negative operating cash flow in Q1 as you've noted in terms of the working capital contributed to that.
Aaron Gray: So that's actually working in our favor. We've got a little more investment in inventory in the quarter and the largest impact around working capital is clearing some accounts payable and accruals.
Aaron Gray: Some of that is just a natural cycle of working capital.
We had a-
at large $9 million interest payment in the first quarter.
Aaron Gray: Some of the annual contracts that we're on, insurance and others have a large payment in Q1 so that's impacting the accounts payable investment.
in terms of translating EBITDA into cashflow.
Speaker Change: Yeah, you've seen a positive momentum and adjustity but dark quarter over quarter. That's based on the underlying investments and improvements we're seeing.
Aaron Gray: and as that cycle through the balance of the aerosol looking to continue to increase that and get back to that positive operating cash position that we saw in Q4.
Speaker Change: Okay, great. Appreciate that color there. I'll jump back in the queue. Thanks very much.
Thank you.
Speaker Change: I am showing no further questions at this time. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.