Ascend Wellness Holdings, Inc.

Good morning and thank you for standing by. Welcome to AWH's fourth quarter and full year 2023 earnings call. I'd now like to hand the conference over to your first speaker today, Rebecca Kaur, Executive Vice President of Investor Relations and Strategy.

Please go ahead. Good morning and welcome to AWH's earnings call for the fourth quarter and full year 2023. The presentation that accompanies this call can be found on our website. awholdings.com slash investors. Before we proceed, I would like to remind you that there are several risk factors and other cautionary statements contained in our SEC and CDAR filings, including our annual report on Form 10-K. We will not review those risk factors and other cautionary statements on this call. However, we encourage you to read them carefully. Various remarks on this call concerning expectations, predictions, plans, and prospects constitute forward-looking statements or information. These forward-looking statements or information are subject to risks and uncertainties that may cause actual results to differ from historical or anticipated results. Any forward-looking statements reflect management's current view only. We undertake no obligation to revise or update such statements or make federal forward-looking statements in the future, except as required by possible law. References may be made during this call to future-oriented financial information and financial outlooks. all of which are subject to the same assumptions, risk factors, limitations, and qualifications as forward-looking statements. While we believe that such estimates have been prepared on a reasonable basis, reflecting best estimates and judgments, the actual financial results of the company may vary from the amounts discussed herein, and such variation may be immaterial. During today's call, we will be referring to non-GAAP measures, such as adjusted gross profit and adjusted EBITDA, as defined and reconciled in our earnings material in the appendix of the presentation. These non-GAAP measures, as defined by AWH, may not be comparable to measures with similar titles used by other companies. Certain information that may be mentioned during this call, including industry information and estimates, is obtained from third-party sources, including public sources, and there can be no assurance as to the accuracy or completeness of such information. Although believed to be reliable, management has not independently verified any of the data from third-party sources. On today's call, we have Abner Curran, Executive Chairman. John Hartman, Chief Executive Officer, and Mark Kassebaum, Chief Financial Officer. With that, I'll turn the call over to Abner starting on slide four.

Thanks. Good morning, everyone, and thank you for joining our fourth quarter and full year 2023 earnings call. As always, I would like to thank our valued stakeholders for helping us deliver a strong Q4 and full year 2023. Before turning it over to John and Mark for an in-depth discussion on our business and financial outcomes, I'd like to provide a brief update on pivotal market and regulatory developments, followed by key highlights about ASCEND. We are eagerly awaiting significant advancements in federal cannabis reform and remain optimistic about the positive changes on the horizon. Our outlook centers around the anticipated rescheduling of cannabis from Schedule 1 to Schedule 3. This potential major catalyst hinges on the DEA issuing a proposed ruling agreeing with the Health and Human Services recommendation to move cannabis to Schedule 3. We expect the DEA to align with the recommendation process and their ruling would likely be followed by a public comment period and a hearing. Although the exact timeline for the DEA's ruling remains unclear, we hope this will transpire before the upcoming presidential election and are pleased to see continued pressure being put on the DEA from many governors, legislatures, and attorney generals who have banded together in various calls for action. The president's mention of cannabis at the most recent State of the Union address was a historic and encouraging conclusion on the topic. Furthermore, we are happy to see how well this conclusion resonated with the American people. We are particularly excited about the potential outcomes of this progression, as we anticipated it could ignite enhanced access to capital, a likely reduction in the cost of capital, and a reduced tax burden on the industry. Additionally, we think a federal catalyst will bring further legitimacy to the industry, which should provide enhanced access to custody, improve relationships with vendors, and provide customers with confidence about the legal future of cannabis. Alongside the near-term prospects for rescheduling, we remain actively engaged in a collaborative effort with many industry peers to challenge the constitutionality of enforcing the Controlled Substance Act on state regulated cannabis businesses. As expected, the government filed a motion to dismiss the case from the lower courts. While we think a trial at the lower court level is not likely, we continue to argue the case for that trial and are waiting for a decision in the spring. While we welcome the opportunity to argue our case in the lower courts, we continue to believe this is a Supreme Court level decision. Although we recognize the extended time horizon of this legal journey, we remain committed to this key initiative. Transitioning from federal updates, we continue to see significant progress at the state level. We are pleased to note that Ohio voters endorsed the legalization of adult use cannabis in November. Subsequent to the voter approval, Ohio legislatures have been debating the final rules and regulations, which we anticipate will be wrapped up shortly and continue to believe the commencement of adult use operations in the second half of the year. Despite the ongoing refinement of the final bill, there is a potential opportunity to establish three new dispensaries, supplementing our existing five, an exciting prospect in a state that holds particular promise. Ohio is a core and important market to us, and we believe we will end up with significant retail penetration in a state with nearly 12 million people and a licensing framework that is similar to what we have seen in Illinois. Ohio is a purple state, and we expect significant opt-outs at the local level but we are quite confident in our ability to use first mover advantage to execute on well-located local dispensaries, which is one of our core competencies. Lastly, in terms of state regulatory updates, we are pleased to see Governor Shapiro of Pennsylvania set a clear mandate to his state legislators, calling on them to expeditiously legislate an adult use bill. We'll be following this closely, but are more optimistic than ever about the prospects of adult use in the near term in Pennsylvania. We are excited to open four more dispensaries there, bringing us to a total of six in advance of the anticipated adult use developments. In Pennsylvania, we believe we have an advantage in locating our dispensaries now, focusing on locating our dispensaries in highly trafficked retail corridors, while many of the early operators had much more limited location options. Let's move to slide five to discuss Ascend's specific highlights. We remain excited about the management transition and what John and his team have accomplished and the team he has pulled together. I am extremely pleased that we are becoming a more mature company, now entering the period in our growth journey to become a free cash flow generating company. 2023 was the first full year since the company's inception that we generated positive cash flow operations and free cash flow. This puts us in a very strong position as we recently began active discussions to refinance our debt, which is due in August of 2025. These preliminary discussions have been positive, and we are satisfied with the market's reception and early indications in regards to this effort. As Mark will describe in detail, we amended our federal tax returns and see a strong likelihood that we will be successful in obtaining the refunds. Several of our states are going through the expected maturation of the retail markets. In these states, we are working to, one, maximize our existing retail profitability, two, further penetrate the wholesale market, and three, build extensive retail partnerships. At the same time, we are in several states that are at the start of their adult use journey. This diversification is important. In the past, limited diversification posted a risk, as Illinois accounted for 100% of our EBITDA in 2021. Since then, we've significantly reduced the balance to less than 55% thanks to the maturation of our businesses in other states. Moving forward, we are continuing our efforts to grow, and we remain disciplined in achieving scale in our core markets. We are focused on a higher return, lower risk growth, and capital allocation strategy that emphasizes expansion of our existing markets and faster conversion to free cash flow generation. With that, I will turn it over to John to take you through specifics of the strategy and provide an update on the results in more detail beginning on slide seven. Thank you, Abner. It's been wonderful partnering with you and the board over the past 10 months, and I'm thrilled by the results the team has generated this year. We have a lot to be proud of. We ended the prior year with just 24 operating dispensaries, and today we have 35 with the next opening later this week. We have expanded our product penetration with a percentage of retail sales from products manufactured by AWH, increasing from 44% in 2022 to 49% for the entire year 2023. Additionally, we more than doubled gross post-sale pounds sold compared to last year, leveraging the same asset footprint of cultivation facilities. We ended 2022 with two medical and four adult use markets, and ended 2023 with one medical market in Pennsylvania, one on the verge of starting adult use in Ohio, and five recreational markets. All of these notable achievements have helped to drive impressive financial results. Our full year net revenue for 2023 was $519 million, representing 28% growth compared to the prior year. This growth was driven by increases across both our retail and wholesale businesses. Our retail business was up 21% for the full year, led by the opening of six new stores and the acquisition of four stores in Maryland, which started adult use sales in July. It was further boosted by the full-year benefit of adult use sales in New Jersey, as well as meaningful increases across our third-party and intercompany wholesale business. This year, we had gross wholesale growth in all six markets where we have cultivation operations, and third party growth in all three of our key wholesale markets, Illinois, New Jersey, and Massachusetts. This growth was driven by an annual increase in the number of third party orders of 125%. Despite the mid-year cultivation setback we experienced in Franklin, New Jersey, the expected pressure our Illinois business faced at the onset of recreational sales in neighboring Missouri we were able to aggressively regain lost ground and deliver adjusted EBITDA exceeding expectations at approximately $107 million, representing 14% growth. Further to this, we meaningfully increased operating leverage for the year, decreasing SG&A as a percent of revenue from 33.8% in 2022 to 30.6% in 2023, representing a 320 basis point improvement. Let's move on to slide 8 to discuss the retail business in more detail. I continue to be very optimistic about our strong retail footprint. This year, we were particularly pleased with some of our new stores, including two of our new outlet stores, New Bedford, Massachusetts and Tinley Park, Illinois. As previously mentioned, we opened four stores since the end of Q3, including our Cincinnati, Ohio store, which opened just after the start of the new year. We are especially excited about the three new stores in Ohio, bringing our total presence in the state to five. We are anticipating a sizable uplift when the state transitions to adult use later in the year. We continue to boast some of the most productive stores in the nation, and I'm proud of the team for always working to refine and optimize our position. In Q4, retail revenue was 69% of our net revenue at $97 million. This was down 4% sequentially, largely led by declines in Illinois due to the expected seasonality and increased competition. However, these declines were partially offset by the three new store openings within the quarter and improvements in our Pennsylvania stores' performance. For the full year, our retail earnings totaled $371 million, reflecting a 21% increase compared to the prior year. This growth was fueled by the additional stores and the full-year impact of adult use sales in New Jersey. Looking ahead, we are actively pursuing opportunities to further penetrate our existing markets and increase our retail shelf space and market share. Specifically, in Illinois, we are pursuing unique partnerships with social equity and recently signed an agreement with the first social equity operator, and the store is expected to open in Q4 of this year. Furthermore, we are employing similar constructs in other states. In New Jersey, for example, we have executed an agreement to partner with a social equity operator and plan to also support bringing this store to market in Q4. In addition to these creative partnership structures in New Jersey and Illinois, we own four more dispensary licenses that are in the process of being constructed in Pennsylvania, adding to the two dispensaries already in operation. Our third dispensary in Pennsylvania, located in the Pittsburgh suburb of Menaka, will open this week. Lastly, in addition to the aforementioned retail expansion plans, we believe the adult use regulations in Ohio will allow for potentially up to three additional stores. We are excited about what lies ahead for our retail business. Let's move to slide nine to discuss the wholesale business in more detail. Throughout the quarter and the entire year, our wholesale division has consistently excelled. We've successfully set ourselves apart, making significant inroads into established markets such as Massachusetts and swiftly capturing market share in emerging markets like New Jersey. As the year concluded, AWA's house brand secured the position as the fourth largest in Illinois, Massachusetts, and New Jersey combined. Furthermore, Simply Earth claimed the number one spot in Massachusetts. and Ozone surged to a third position in New Jersey and maintained a solid number three standing in Illinois. Our brands continue to fuel the growth of our wholesale business. Our gross wholesale revenue for the full year was up in all six of our wholesale markets, and the number of third-party orders were up 125%. Q4 was our fourth quarter in a row with both gross and third-party wholesale sales growth. This is an extremely impressive achievement, especially given the market normalization occurring in several of our key states. For Q4, our net wholesale revenue was $43 million, up 7% compared to the prior quarter, driven by increases in New Jersey and Massachusetts. And for the full year, our net wholesale revenue was $147 million, up 47% compared to the prior year, led by third-party sales increases in New Jersey, Massachusetts, and Illinois. In New Jersey and Illinois, we have over 90% market penetration and have been keeping pace, establishing relationships with the new doors. In Massachusetts, we have gone from zero to over 50% market penetration in a mature market in two years. I'm extremely proud of the team for delivering these results. which made up 28% of our net revenue for the full year. Looking ahead, we have opportunities for continued expansion in our existing footprint. For example, we have recently announced the signing of a definitive agreement to acquire a second cultivation facility and associated operations in Massachusetts. Once we complete additional minor upgrades, the facility will have 15,000 square feet of canopy. However, Immediately following the signing, our team got to work and built out a state-of-the-art kitchen, which has already enabled us to launch new products into the market. The expansion of our cultivation and production capacity in the state is a direct correlation to the increasing demand for AWH's products, underscored by the resounding success of the Simply Herb brand and the success of our three retail stores in the state. Being in a position to expand here is a true testament to how well our business is doing. This past year has been truly remarkable, and I look forward to continuing to deliver in the coming quarters. Next up, our newly appointed CFO, Mark Kassebaum, will provide a detailed view of the financials for the quarter and begin discussions of the 2024 full-year outlook. Mark is only three months into his journey here at Ascend, and we are pleased to have him on board. He comes to the company with extensive FP&A experience, which he has gathered from several key omnichannel companies, such as Ralph Lauren, UPS, Bed Bath & Beyond, and more. With that, I will turn it over to Mark to begin on slide 11. Appreciate it, John. Good morning to all. I'm delighted to be here. The initial three months of my role have been fulfilling as I've begun to familiarize myself with the business and started to pinpoint potential opportunities. I've already had the pleasure of meeting several of our supportive lenders and investors, and I eagerly anticipate connecting with the rest of you in the upcoming weeks. As highlighted by John, we are delighted with the strong finish to the year. Furthermore, we are proud to have achieved a significant milestone by generating positive cash from operations and positive free cash flow for the first full year since the company was founded. Total revenue for the full year amounted to $635 million, representing 30% year-over-year growth, while revenue net of intercompany sales increased by 28% year-over-year to $519 million. Meanwhile, adjusted EBITDA for the full year increased 14% to $106.5 million. These record full-year metrics were fooled by the performance in both the retail and wholesale businesses. John covered the main drivers on the full year, so let's shift to discuss the consolidated Q4 results in detail. Q4 was another great quarter, driven by execution in the wholesale business. Net revenue was $140.2 million, which is largely flat compared to the prior quarter. This was driven by declines in Illinois retail being partially offset by wholesale growth in New Jersey and Massachusetts. as well as the opening of three new stores within the quarter and strengthening of our Pennsylvania retail stores. In comparison to the prior year, net revenue for the quarter increased 25% due to the opening of six new retail dispensaries throughout the year, the acquisition of four dispensaries in Maryland, and meaningful increases in intercompany and third-party wholesale sales compared to the prior year. In Q4, adjusted gross profit increased 7% to $60 million, with margins expanding 294 basis points to 42.9%. This expansion was driven by imprudence in utilization and productivity in New Jersey and Massachusetts cultivation and production facilities, partially offset by margin declines in Illinois. Our adjusted EBITDA results were meaningfully above expectations. improving 10% compared to the prior quarter to $32.4 million. Meanwhile, margins improved 218 basis points sequentially to 23.1%. These sequential increases were driven by gross margin improvements, which were partially offset by the timing of certain expense accruals. Overall, we were pleased to deliver another strong quarter, demonstrating not only our commitment to excellence, but also our dedication to achieving and surpassing our performance goals. Let's move on to slide 12 to review cash flows and the balance sheet. In Q4, we generated approximately $17 million of cash from operations and $8.4 million in free cash flow, inclusive of $8.2 million in capital expenses related to dispensary bills and cultivation enhancements. We ended the year with 73 million of cash and equivalents, 236 million of net debt, and 223 million of fully diluted shares outstanding. For the full year of 2023, we achieved a significant financial milestone by generating approximately 55 million in cash from operations and 30 million in free cash flow. This accomplishment marks the first time in our history that we generated positive cash flow. It's worth noting that these metrics do not include 21 million of benefits we received related to the employer retention tax credit. We're thrilled to reach this milestone and generate positive cash flow as we approach the refinancing of our term loan due in August of 2025. As Abner mentioned, we have taken a very proactive approach to this refinancing, and our initial discussions with existing and new lenders have been productive and we are pleased with the progress we are making. Moving to tax, we filed 2020, 2021, and 2022 amended federal tax returns. We plan to file 2023 federal return as a normal corporate taxpayer, excluding 280E. As a result of these amendments, we expect these refunds to cover our 2023 federal tax obligation. Looking ahead to 2024, we anticipate another year of meaningful free cash flow generation as we expect to spend approximately $35 million in CapEx to support the build-out of the existing pipeline. Consistent with prior years, we expect to see nominal sequential pressure from seasonality. However, this will offset the full quarter benefit of our new store openings, and we anticipate Q1 revenue to roughly be in line with Q4, with a mid-single-digit decline in sequential EBITDA. For the full year 2024, we are targeting double-digit growth in top and bottom line as we benefit from continued new store openings and expansion in our wholesale business. A portion of our strategic focus across the retail and wholesale businesses is to continue with the value-based offerings. As a result, we anticipate our 2024 gross margins to remain in line with 2023. However, We continue to scale and leverage the business to provide a modest increase in EBITDA margins. Before opening up to questions, I want to acknowledge the team for working hard to deliver industry-leading growth in 2023. I am excited to be here and look forward to continue to deliver for our stakeholders in the coming quarters.