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spk05: ladies and gentlemen thank you for standing by and welcome to the acreage holdings q1 21 earnings 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 to ask a question during the session you'll need to press star 1 on your telephone if you require any further assistance please press star 0. i'd now like to hand the conference over to mr steve west vice president of investor relations please go ahead
spk02: Good morning, everyone, and welcome to the Acreage Holdings first quarter conference call. Joining me today are Peter Caldini, our chief executive officer, and Steve Gertz, our chief financial officer. This call is being recorded and will be archived on our investor relations website at investors.acreageholdings.com. Today's call contains forward-looking statements subject to various risks, uncertainties, and other factors that could cause actual results to differ materially from those forward-looking statements. Any such information and statements should be taken in conjunction with cautionary statements in our press releases and risk factor discussions in our public filings found on CDAR and EDGAR, as well as our investor website. Any forward-looking statements reflect management's expectations as of today's date, and we assume no obligation to update them other than as may be required by applicable securities laws. Now, for your future scheduling purposes, our second quarter 2021 earnings release is tentatively scheduled to be issued after the market closed on August 10th, 2021, and subsequent analyst call will be held the morning of August 11th, 2021. I will now turn the call over to Peter.
spk03: Thank you, Steve, and good morning, everyone. I am thrilled with our financial performance in the first quarter as we reported positive adjusted EBITDA for the first time in our history. Additionally, our revenue accelerated to 58% growth year over year, and our gross margin of 53.7% once again set a company record. This all validates our refocused strategy, and we expect our financial performance to continue to improve in the future. Looking deeper into our operational performance, our first quarter reported retail revenue was $25.8 million, a 47% increase year over year. Although part of this growth was driven by the acquisition and consolidation of our New Jersey locations in June 2020, our existing stores that have been open for more than 12 months also delivered strong performances. Our company-owned same-store sales growth during the first quarter was 16%, marking the ninth consecutive quarter of double-digit growth. New dispensary growth, strong same-store sales growth, and the continued growth of our portfolio brands were the primary drivers of our retail sales performance. During the quarter, we launched several new CBD-derived products under our Innocent brand in Illinois. Our team in Maine also launched several new products and form factors, including flour, vapes, concentrates, and edibles. And in New York, we were approved for six new SKUs under the Botanist brand. In our wholesale business, we reported revenue of $10 million, which was a 53% increase year over year. Wholesale revenue for the first quarter of 2021 represented 26% of our total revenue. Greater strategic focus on the wholesale markets in Pennsylvania, Illinois, and Massachusetts allowed us to take advantage of opportunities in these markets to drive additional revenue and profits. We continue to have high expectations for our wholesale business throughout 2021 and beyond. There are significant growth opportunities through increased order size and velocity as we complete our expansion projects in Illinois and New Jersey, and as we plan for additional expansion opportunities in New York and Pennsylvania. Additionally, in Massachusetts, We continue the build out of our Edibles Kitchen in Leominster, which will lead to increased wholesale sales for us in that state. In addition to the improved financial performance during the first quarter of 2021, there were also some operational achievements that I would like to highlight. First, in New Jersey, we opened our third dispensary in Williamstown, which is the maximum allowable by current state regulations. We are one of the only New Jersey operators to have fully built out our dispensary footprint. We are also on schedule to complete the expansion of our Egg Harbor and Sewell cultivation facilities in the first half of 2022. These facilities will supply all of the product required for sale at our retail dispensaries, as well as allow us to continue our strong presence in the wholesale market. We are on track to be the leader in New Jersey as soon as adult new sales begin in late 2021 or early 2022 with our three retail dispensaries, one of which is on the iconic Atlantic City Boardwalk and nearly 200,000 square feet of cultivation and processing space. In Illinois, progress continued on our expansion of cultivation and processing facilities as we brought two additional flower rooms online. Once completed, the facility is expected to encompass 80,000 square feet of cultivation and drying rooms and will include state-of-the-art extraction capabilities for production of a wide assortment of derivative products and edibles to support both our wholesale and retail sales efforts. We still expect expansion completion later this summer. In New York, we were approved by the state for six new product SKUs under the Botanist brand on the retail front. On the wholesale front, we signed agreements with two operators to begin selling the Botanist branded product through their dispensaries beginning in the second quarter of this year. We are currently exploring opportunities to increase our cultivation capacity and retail presence in New York ahead of expected adult use in 2022. In Ohio, our partners continue to lead the state in terms of retail sales and achieving full vertical integration. We currently estimate our retail dollar share has grown to approximately 20% based on publicly available data. With a successful seed planting in December, we now expect the first harvest in the second quarter. Our partners in Ohio continue to rapidly grow the Botanist brand with the launch of several new gummies and gel capsules. We expect the final license transfer and consolidation of the Ohio operations to Acres to be completed in the later part of 2021. And finally, we successfully completed negotiations for the sale of our Florida operations. As you know, we previously determined that our operations in this state were not core to our future plans. The sale of our Florida operations, which closed in the second quarter of 2021, has the benefits of removing a drag on our earnings, eliminating non-productive use of management time, and contributing additional capital that can be used to support other activities. I will now turn the call over to Steve to discuss the financial results in more detail. Thank you, Peter, and good morning, everyone. Before I begin discussing the financial results for the first quarter of 2021, I want to take a few moments to introduce myself. I was eager to join Acreage earlier this year, as I believe that it is well positioned to take advantage of opportunities in the U.S. cannabis market, given its asset base and presence in several key states. I'm also excited to continue working with Peter, as we have established a strong relationship where we can complement each other's strengths and experiences. My experiences prior to joining Acreage have been diverse, but provide me with many skills that are necessary for my new role as CFO. I gained agricultural and processing experience in various roles at Maple Leaf Foods. I gained significant retail experience at Sobeys. My role as CFO, I publicly traded Go Easy, provided me with capital markets, restructuring, and strategic planning experience. Finally, my participation over the last 16 months with a cannabis-focused SPAC allowed me to explore many national and international cannabis companies. I look forward to using the skills gained from the prior roles in assisting acreage in achieving the opportunities available to it. Last night, we reported our first quarter 2021 results. Our reported revenue was $38.4 million, which increased $14.2 million, or 59%, compared to the first quarter of 2020. This also represented an acceleration versus our fourth quarter of 2020, where revenue growth was 50%. On a sequential basis, our reported revenue increased by 6.9 million or 22% compared to the fourth quarter of 2020. This revenue growth was primarily driven by our Midwest and New England regions, which exhibited strong overall performance. as well as the revenue contribution from our New Jersey operation, which were acquired in June 2020. Somewhat offsetting these revenue increases were revenue declines in Oregon, Maryland, and North Dakota, which we exited since the first quarter of 2020 or are in the process of exiting. Included in our reported revenue for the quarter was $2.5 million in fees collected from our managed entities. $1.7 million of these fees related to periods prior to the first quarter of 2021. We have excluded these fees that are related to prior periods in our calculation of adjusted EBITDA for the quarter. While this management fee revenue should continue going forward, I do not anticipate that they will remain at the level we experienced in the first quarter of this year. Gross profit during the quarter was $20.6 million. which was an increase of 10.7 million or 107% compared to the first quarter of 2020. Both the growth in revenue and efficiencies achieved at our production facilities drove the increase in gross profit. In addition, wholesale cost of goods sold for the comparative period were driven by the initial setup costs and consequential expansion impact of various cultivation facilities that did not occur in the current period. Finally, the suspension of operations at Form Factory, a manufacturer and distributor of cannabis-based edibles and beverages, in March 2020 reduced gross profit in the prior period as a result of consequential inventory write-offs. Gross margin during the quarter was 53.7%, which was a 1,262 basis point improvement compared to the first quarter of 2020, and a 360 basis point improvement compared to the fourth quarter of 2020. I am pleased to note that this reported gross margin of 53.7% was another record for the company and more validation that our refocus strategy is working. During the quarter, our G&A spending was $9.2 million and our spending on compensation was $10.4 million. Combined, this represents a decline of 7.9 million, or 29%, compared to the third quarter of 2020. Cost optimization activities over the past 12 months, together with our accelerated revenue growth, have helped to bring G&A and compensation expenses to more sustainable levels. We expect to gain additional operating leverage from these expenditures as our revenue continues to grow in future periods. EBITDA during the first quarter of 2021 was $1.6 million, which was a significant improvement compared to our EBITDA loss of $249.1 million in the first quarter of 2020. Our adjusted EBITDA, which excludes impairments, equity-based compensation expense, and unusual items that are not expected to recur in future periods, was also $1.6 million for the current quarter. This represents a significant improvement compared to the adjusted EBITDA loss of $12.3 million in the first quarter of 2020, and a sequential improvement from the adjusted EBITDA loss of $3.5 million in the fourth quarter of 2020. Finally, adjusted EBITDA from core operations, which excludes markets where the company has entered into definitive agreements to exit, and startup ventures such as beverages and CBD, was 3.1 million for the first quarter of 2021, indicating the company's core markets are still being negatively impacted by its non-core operations. I would now like to briefly discuss the results of our managed entities. During the first quarter of 2021, our managed entities generated 16.8 million in net sales, which increased 64% compared to the first quarter of 2020. This increase was driven primarily by same-store sales growth of 99% and was partially offset by moving New Jersey from managed entities to our consolidated results. On a geographic basis, Ohio was once again the biggest contributor of revenue growth as our partners there continued to deliver strong performance. Our managed entities' first quarter EBITDA of $4.7 million increased $5.5 million compared to an EBITDA loss of $0.8 million in the first quarter of 2020. This year-over-year EBITDA growth was driven primarily by the Northeast and New England regions. Going forward, we will continue to provide details on the financial performance of our managed entities. With the recent restructuring of our managed service agreement with the operators in the state of New Hampshire, we will no longer include the results from operations in the results of our managed entities. Moving to our balance sheet, we ended the quarter with $46 million in cash and restricted cash on hand. As Peter indicated, subsequent to the end of the quarter, we closed on the previously announced sale of our Florida operations. This transaction provided an additional $20 million to the company's cash balances, as well as $28 million in secured notes receivable that will be repaid over the next 13 months and $7 million in shares of the acquiring entity. While our cash position has strengthened considerably, improving the overall strength of our balance sheet continues to be a priority for the organization. Our goal is to once again build the acreage balance sheet as a strength so we can accelerate our organic growth in core footprint and be well positioned to take advantage of marketer opportunities that come up. And finally, we continue our discussions to divest our remaining health for sale assets in California, Michigan and Oregon. That concludes my prepared remarks. I will now turn the call back over to Peter. Thank you, Steve. As I look forward, the rapidly changing regulatory environment continues to shape the US cannabis industry. Recent and expected regulatory change appears to be good news for the industry and specifically for acreage. And the near future looks to be very dynamic, to say the least, at both the state and federal levels. At the federal level, the Safe Banking Act passed the House of Representatives for the fourth time, and the tone from Senate Democratic leadership is very positive with respect to cannabis reform. We cannot say if the Senate will approve safe banking or even take it up for a vote. There is still some gap between progressives and more moderates that needs to be bridged before any real federal reform measure is passed, so patience is still required. However, as we have been saying for more than a year, the momentum continues to build, and it's not a matter of if federal reform passes, but when. That said, we continue to focus primarily on progress at the state level, which we expect to continue. Since our last earnings call just a couple months ago, New York has joined New Jersey in legalizing adult-use cannabis. acreage as a strong footprint in both these densely populated states, and we're building out additional infrastructure in preparation for adult use. We expect to command significant leadership positions in both states as soon as adult use sales begin. We're now looking north to Connecticut as another likely state to legalize an adult use program, and we expect Pennsylvania could be close behind in another year or so. Additionally, as we have said for a long time, we expect Ohio would then follow Pennsylvania, continuing the domino effect throughout the Northeast and Midwest. This bodes well for acreage, as these states are the epicenter of our core footprint and the strength of our investment thesis longer term. As I said in our last call, we have developed a focus strategy that acreage will follow as it pursues its near-term goals. We remain focused on three key strategic objectives, driving profitability, strengthening our balance sheet, and accelerating our growth in our core markets. The successful execution of our plan against these objectives will lead to a continued improvement on our financial performance, which will benefit all acreage stakeholders over the long term. We have already taken steps to improve profitability, and the results were clearly displayed this quarter. Prior restructuring efforts to right-size a company's organizational structure have resulted in lower levels of G&A and compensation expenses. We continue to diligently control cost, improve operational efficiencies, and accelerate organic growth in our core markets to continue to report improved profitability going forward. While I'm pleased to check off the box of positive EBITDA for investors, we are not nearly done. We continue to push towards achieving greater levels of profitability for each quarter going forward. Steve touched on one of the most crucial elements of reestablishing acreage as a premier MSO in the industry. That is strengthening our balance sheet. We have made significant progress toward that goal in the past few months. The sale of Florida has provided additional cash to fund our operational activities. We extended the deadlines and some of our debt instruments, and we're improving our internal processes around cash and inventory management that will improve our working capital. And we're exploring options to further bolster our balance sheet to the point that it is a core strength for this company once again. Finally, accelerating our growth in our core markets remains a key objective. We have very strong businesses in the attractive markets of New Jersey, New York, and Pennsylvania, as well as our managed entity in Ohio that are well positioned to take advantage of the growth that is expected in these states. We have the right to win in these substantial markets, and we are well positioned to take very strong leadership positions in all these states, which should drive outsized shareholder value for the foreseeable future. We expect to accelerate our growth in our core markets primarily through new dispensary openings and cultivation expansion projects, and we may also explore bolt-on acquisitions where it makes sense. We also have a strong position in more developed markets such as Illinois, Massachusetts, Maine, and Connecticut. We will look to improve our market position and continue to deliver strong levels at EBITDA and cash. Accelerating our growth in our key markets also involves continued marketing and product innovation. In this regard, we recently announced an exciting new partnership that will help to drive our emerging CBD business. As recently announced, we reached an agreement with Medterra to partner in the development of our CBD business. Medterra is a leading player in the U.S. CBD market with a substantial e-commerce platform backed by significant sales and marketing support. Under this agreement, we have agreed to license our botanist brand, which we already use with CBD products in select markets. I'm excited about this unique partnership to leverage our flagship botanist brand with Medterra's fastest-growing CBD brand, Five Farms. This agreement will get acreage and CBD products to market in the fastest possible time and with no capital investment. Although the launch of this new venture will produce a modest drag on earnings in the second half of 2021, in the future, acreage and its shareholders will realize high-margin, high-return revenue streams. I am confident this is the best shareholder-friendly approach to competing in the CBD industry without diverting any capital or management resources. I would like to close by recapping the most important items from today's call. Our financial and operational fundamentals continue to improve, and we did what we promised shareholders last year. We delivered positive EBITDA. We have strengthened our balance sheet and have plans to continue with that exercise. Finally, we remain focused on accelerating our growth in our core markets through continued capital investment and renewed marketing and product innovation initiatives. The future continues to look bright for acreage and its shareholders. Lastly, I would like to thank our associates in the field and call out their tremendous passion and professionalism they have displayed during the most challenging year imaginable to bring relief to hundreds of thousands of customers across the United States. With that, I will now have the operator open the line for questions.
spk05: If you'd like to ask a question at this time, please press star then the number one on your telephone keypad. If you'd like to try your question, press the pound key. First question comes from Vivian Azar with Cohen.
spk04: Hi, good morning. Thank you. I wanted to dive in a little bit more on gross margin. Clearly very impressive improvement both sequentially and year over year. How should we think about, perhaps a little bit more concretely, gross margin trajectory from here, in particular given the divestiture in Florida, which I would presume would have been a higher gross margin business? Thanks.
spk03: Yeah, hey Vivian, it's Steve here. We've always said that our long-term gross margin should be in the 50%, in the mid-50s range, which is where we're at. 2-1 gross margin was a little bit inflated because of the MSA fees related to prior periods that we received. So that won't continue going forward. But, you know, if we look to continue and continue with our operations, the divestiture of Florida shouldn't have a significant impact on gross margins. As we look to further divestitures, in particular, Oregon, which is a bit of a drag on the business right now, that should help to increase gross margins. And then finally, as New Jersey and New York come more on stream, areas where we are vertically integrated, given that we will be able to record both the wholesale and the retail gross margin, that will help to inflate that number again. So that mid-50s guidance still continues. We're there now. We expect to continue, if not slightly increase it as we move forward.
spk04: Understood. But just to follow up on that then, from a near-term perspective, not unreasonable to think that maybe you see some sequential degradation given the one-time MSA, and then that's kind of your normalized base from which you would expect first margin expansion from there?
spk03: Yeah, that's correct. You know, you take that $1.7 million or so in revenue out, That would give a real normalized number for the quarter, which is indicative of where we're at now. And then we'll see some sequential increases on that as we move forward and expansion continues.
spk04: Great. Thank you. And my second question is on New York. Clearly a great opportunity and nice to see that you got approvals on new products and are working with other dispensary operators to expand availability of the Botanist brand in the market. But while we're waiting for firmer regulatory framework, how are you guys thinking about Your balance sheet in particular, given some of the discussion around the cost of cultivation expansion and potential licensing around cultivation specifically in New York. Thanks.
spk03: Yeah, if we look at our balance sheet, we've made some strides in the last few months. The sale of Florida obviously gave us $25 million in cash that could be used for operating purposes. There's further cashless from that sale as we collect upon the notes receivable, $28 million in total with notes receivable, and we choose to deal with the shares that we got as part of that acquisition when that makes sense for us. On top of that, we assembled a number of debt instruments and put that in place last year. The capital markets are probably a little bit more open to transactions now. So I would say there are opportunities for us to continue to strengthen our balance sheet, potentially reduce our cost of borrowing. We're always looking at the markets to see what might be available to us, and we're prepared to act when that's necessary. As far as the expansion goes, the Florida transaction, some of the further sales that we've talked about that we've anticipated, as well as starting to generate positive cash flow from our operations, will fuel the expansion activities that are required in New York and New Jersey in particular.
spk04: Understood. Thank you very much.
spk05: Next question comes from Aaron Gray with Alliance Global Partners.
spk03: Thanks for the question, and nice to see the improvement in inflation to profitability. So first question for me, just coming off of some commentary on the balance sheet, you also mentioned the potential for some, you know, bolt-on acquisitions that might seem accretive. Obviously, we've seen, you know, a lot of M&A in the past, you know, six months or so, you know, both large and small within the industry. So just wondering if you could, you know, fly some color, you know, maybe more close in terms of where you might expect from that M&A.
spk02: I know PA, you know, you don't have any retail currently.
spk03: So any additional color will not be attractive to you on the bolt-on front would be helpful. Thanks. Yeah, thank you, Aaron. This is Peter. You know, I think as we look at our footprint, I think, as we mentioned before, we're very well positioned in some very attractive markets, especially as adult use continues to gain ground in these markets. When you talk about New Jersey, New York, potentially in the future in Ohio, as well as Connecticut and Pennsylvania. So I think our approach around M&A activity is really opportunities that could be more strategic in nature that adds a little bit more infrastructure where we might be not have the existing scale. So as you mentioned, Pennsylvania could be a good opportunity for us around dispensaries, looking at potentially adding a little bit more scale in Illinois, and also potentially the back end of the business in Connecticut. But you know, as I mentioned before, we have a tremendous amount of opportunity to grow the business just organically with our existing footprint. But it's not to say that we won't look at some of these opportunities more strategically. And if it makes sense for us, we'll certainly take advantage of it. All right, great. Thanks for that, Keller. And then the second question is more towards potential changes at the federal level. Obviously, if there's something more comprehensive, then that would trigger the acquisition by Canopy. But just thinking of things through that lens and what might pass between either safe banking, some type of safe plus, more comprehensive federalization. How do you think about managing the business for those potential changes? You are hearing about you know, some other competitors, you know, setting up for potential broader change in terms of, you know, operation within the United States. So just curious in terms of your outlook on that, just given your more focused presence right now within your core markets in the Northeast. Thank you. Yeah. So around the regulatory framework, you know, we're seeing a lot of positive momentum both at the federal as well as the state level. You know, as I mentioned in my opening remarks, I don't think it's a question of if this happens, it's more a question of when. As we manage our business, and, you know, it's hard for me to predict what's going to happen at a federal level, and, you know, I don't want to get in the business of making those predictions. As we operate the business, we see a lot of movement at the state level. You know, certainly we're well positioned in New Jersey, New York, which has passed, and then we expect that to continue throughout the Northeast. In terms of how we manage our business, we continue to be focused on our core states. I think we have good infrastructure in these states, and we'll look to continue through capital projects to build them out. In terms of the potential on a federal level, I think any time we look at expanding our cultivation base, we always look at, you know, is this something that can be sustainable in the long term? But, you know, right now we see a lot of opportunities to continue to build our footprint at the state level, and that's how we continue to manage our business.
spk00: Okay, great. Thanks for the call.
spk05: Next question comes from Glenn Mattson with Leidenberg Thalmann.
spk00: Hi, thanks. Nice quarter, great results. So building on Aaron's last question about federal reform, obviously, timing and everything is difficult to predict, but can you remind us what you've said in the past and maybe if it's changed at all, but that if it were just to be safe banking that past or that core part of the discussion, would that be enough to trigger would that be considered federal permissibility?
spk03: Yeah, I think, listen, I think it really depends on what and how that's drafted in the legislation. But, you know, right now I think the way we look at it is we continue to be focused on our existing business and the footprint. And, you know, certain language that's placed in any type of legislation could be a triggering event. But, you know, right now I think it's very difficult for us to predict what that would be. Okay.
spk00: And then you guys mentioned Ohio would roll into the gap results in the second half. I had it like third quarter. Is that the right time frame to think about it, or is it unclear right now as to what the timing is on that?
spk03: It's a little unclear. It's subject to the regulators in that state going through the analysis and approving it. So, you know, we're eager for that to happen as soon as it's possible. But, again, it's outside of our control. It's up to the regulators when they pull it. trigger on that okay great a couple more uh quick ones on the cost optimization the the the major changes are done now so future operating leverage which is just the result of uh you know leverage off the higher revenue base basically that's correct i wouldn't say you know we're never complete we're always going to look at the in particular the corporate footprint make sure we're appropriately sized for the business that we've got you know over the last 12 months there's been a significant reduction in the corporate footprint to right size the business We don't have anything additional planned at this point in time, but it's something we continue to monitor. The leverage you're right, though, will continue to come down as our top-line revenue increases.
spk00: Great. And lastly, just on CapEx, I'm not sure maybe you updated it and I missed it, but what do you expect for this year?
spk03: I don't think we've given guidance on CapEx before, but I think that the trend that we experienced for the first quarter is likely to continue at a similar rate as we move forward. We've got some projects underway right now, in particular Illinois, and then we've got some further capital plans, in particular in New Jersey, as we get ready for legalization in that state. Right.
spk00: Okay. That's it for me. Thanks.
spk05: Once again, to ask a question, please press star one on your telephone keypad. Next question comes from Bill Kirk with MKM Partners.
spk01: Hi, thanks for taking the questions. I have a couple related to the IBP with Canopy. First, were the cost-cutting changes in the quarter, were any of those or any portion of those mandated by a triggering of any of the IBP covenants? And then second, I think the plan with Canopy requires about $37 million in 2021 adjusted EBITDA. Do you think you'll be able to reach that number over the next three quarters? Thanks.
spk03: So, Bill, I'll address the first part of the question, which is Peter. The decisions around the organizational restructuring was driven by us, as Steve mentioned. We certainly saw an opportunity to right-size the footprint based on where we are as a business and what we need to accomplish. So that wasn't driven by any type of discussions with Canopy. As it relates to the target, I'll pass that over to Steve. yeah we're not giving forward guidance and you know i want to avoid getting into that what i can say though is we've got a very strong relationship with our partners at canopy and we're confident we'll be able to manage through the details of that arrangement uh and do what's best for the shareholders of both acreage and canopy going forward okay thank you at this time we have no further questions and that does conclude today's conference call you may now disconnect
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