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spk01: Welcome to the AIR Wellness 4th Quarter 2021 Earnings Call. Joining us today are AIR's CEO, Jonathan Sandelman, the company's CFO, Brad Asher, and the company's Co-Chief Operating Officer, Jennifer Drake. The company will discuss forward-looking matters on this call, including targets and revenues and adjusted EBITDA. This forward-looking information is subject to the assumptions and risk as described in the company's management discussion and analysis for the quarter ended December 31, 2021. As well, we remind you that adjusted EBITDA is a non-GAAP measure. We refer you to the reconciliation to GAAP measures and the other disclosure concerning non-GAAP measures contained in AIRS management discussion and analysis for the quarter ended December 31, 2021. I will now turn the call over to AIR CEO, Jonathan Sandelman. Please go ahead.
spk06: Good morning, and thank you for joining us. 2021 was a transformational year for our footprint, talent, and processes, as well as culture, all contributing to our mission to become the largest cultivator of high-quality cannabis in the United States. In the last year alone, we grew revenue 130% over prior year, from $155 million to $357 million. We grew adjusted EBITDA 83% over prior year, from $52 million to $98 million. We deployed $123 million in capex, closed eight M&A transactions, added five states to our footprint, added 62 dispensaries, added eight cultivation facilities, and welcome 1,600 talented people to our organization. 2022 will be a transformative year for AIR's earning power, but it will come later than we expected. When engaged in the scale of transformation that we are undergoing, there are three primary areas of risk, build-out, regulatory, and market conditions. Thankfully, our build-out phase is nearly complete, with 95 percent of our current CapEx cycle fully constructed. Building the number and scale of facilities that we have in a pandemic and global supply chain crisis was challenging. While it took longer than we would have liked, we are essentially past the build-out risk stage. We currently find ourselves in the second bucket, the regulatory risk phase. Our facilities are essentially built, and now we're waiting for approval to open them. Looking back at the assumptions we made in 2021 when setting our 22 guidance, we recognized that we were wrong about how long approvals would take. COVID had a significant impact on the ability of state and local regulators to conduct in-person inspections. which has lengthened the timeline beyond the cushion we accounted for. For example, our new 80,000 square foot Arizona cultivation facility, which we expected to be producing revenue for us already, opened months later than forecasted due to a slow inspection process. And now Massachusetts adult use retail, New Jersey adult use retail, and our 75,000-square-foot cultivation facility in New Jersey are all waiting for approval to open. In Illinois, our acquisitions are waiting for regulatory approval to close. We have no doubt that these approvals will come. It's just a matter of when. The last bucket of risk is market conditions, which we currently see as a combination of supply and demand imbalance and share of consumer wallet. It makes sense for AIR and other operators to build cultivation capacity ahead of expected demand growth. And that capacity, coming online, has caused a temporary imbalance in supply and demand, which has resulted in price compression. We see this in Pennsylvania and Massachusetts in particular. We believe Massachusetts will right itself as adult use stores finally open in the Boston area. But in some states like Pennsylvania, this imbalance may persist longer. Looking at the consumer wallet, it's clear that due to the ongoing inflation, consumers need to spend more money on other necessities, which leaves less money to spend on cannabis, which in addition to the pricing pressure previously mentioned, is why we believe the industry has recently seen declines in market size. This situation is especially impactful to cannabis because there's no consumer financing or credit cards available in our industry. Though passage of safe banking could change that if it were to occur. Though the market has been declining, our retail market share continues to either grow or remain flat in the states where we operate. And our updated CPG brand portfolio that we reintroduced to the market last quarter has been designed with the products that span premium to value. We are ready to meet our customers wherever they are in their cannabis journey. We are confident that the heirs' earning power will be as strong as ever. Although delayed on the factors that we discussed, I will now turn the call over to our Chief Financial Officer, Brad Asher.
spk03: Brad Asher Thanks, John, and good morning, everyone. Full-year sales of $358 million represents an increase of $202 million, or 130 percent, from the prior year of $155 million. Our original markets of Massachusetts and Nevada increased $50 million year-over-year representing growth of 32% and making up approximately one-fourth of the total increase. The remaining increase of $152 million was driven by M&A during the year, including expanding our operations from two states to seven states. Fourth quarter sales increased $16 million, or 16% sequentially, from $96 million to $112 million. Same-store retail sales increased 5% sequentially during a down quarter for our markets according to third-party available data. The balance of the sequential growth was driven by M&A, primarily the acquisitions of PA Natural and GSD New Jersey, and partly offset by lower wholesale revenue, which we mitigated by increasing the amount of internal products sold through our stores. Full-year adjusted EBITDA of $98 million represents an increase of $45 million, or 83%, from prior year. And fourth-quarter adjusted EBITDA of $26 million is in line with prior quarter. U.S. GAAP loss from operations was $14 million and $56 million for the fourth quarter and full year, respectively. To counter the pricing ebbs and flows the industry has experienced, we have been hyper-focused on operational efficiency metrics, including optimizing headcount and tightening our cost structure across the board. As a result of this effort, we anticipate any future increases to SG&A to be highly correlated with significant milestones of sales growth, such as adult use in Massachusetts and New Jersey. 2021 finished with adjusted EBITDA margins of 27.4% for the year. We anticipate margin expansion this year to be closely linked to the increased biomass production throughout 22, which is still anticipated to grow over 140% year-over-year. Full-year adjusted gross profit of $207 million represents an increase of $116 million, or 126%, from the prior year of $92 million. Adjusted gross margins of 58 percent for the year and 57 percent for the quarter were in line with trends and on pace with 59 percent in prior year. The slight decrease was a result of pricing fluctuation in certain markets. U.S. GAAP gross profit was $51 million and $138 million for the fourth quarter and full year, respectively. Moving on to our balance sheet and cash flow, we ended the quarter with $154 million of cash on hand, During the year, we invested $123 million for CapEx, including bridge financing and $97 million of cash consideration for M&A. Ahead of the upcoming growth opportunities, we continue to build inventory with $51 million of operating cash flow invested in inventory over the course of the year. Our ability to monetize this investment alongside the milestone growth events for the company will be the driver of positive operating cash flow in the second half of the year. In the fourth quarter, $148 million was received through debt financing, further increasing our capital position. Additionally, subsequent to year-end, we closed on $26 million of real estate-backed financing with an industry-leading 4.625 percent annual interest rate. The transformation in 21 shaped not only our footprint, but our identity as an organization. 22 is set to continue this momentum with a comparable level of growth, but unlike 21, this is only partly driven by M&A. The real transformation this year will occur with our existing states as the $200 million in CapEx invested in 21 and 22 comes online, paired with the catalyst of adult use for both Massachusetts and New Jersey. Our team is poised for the challenge, ready to capitalize on this next stage of AIRS growth. With that, I'll hand it over to our co-COO, Jen Drake.
spk02: Thanks, Brad. Let's now discuss our existing operations and key drivers of growth in our earnings power. Some of you may be aware that the Nevada market has shrunk in recent quarters due to COVID and seasonal factors. But our business in that state has been very strong, which has resulted in us picking up share. Pine Flower has now been the top-selling flower brand in Nevada for five straight months, according to BDSA. And now that the Tahoe Hydro acquisition is closed, we can expect more internal sourcing and the potential for a larger wholesale business. In Arizona, our retail sales have been relatively flat since September, in a generally flat market. Our cultivation expansion, where construction was finished in December, is expected to begin generating wholesale revenue in Q2 and to drive better product availability in our stores. Our Pennsylvania business consists of eight total stores today, five stores that are fairly new, and still ramping in a constrained medical market, and three stores that are more established, which we purchased last year. Our retail market share in Pennsylvania has grown as these newer stores have ramped. As most people on this call know, growth in the Pennsylvania market has slowed and wholesale pricing has declined from the high levels we saw earlier in 2021. This is because additional capacity has come online ahead of expected adult use demand And because we have plenty of capacity today, we have decided to pause our cultivation expansion plans in Pennsylvania to align more closely with the timing of adult use. In Massachusetts, our business in place today is still two medical stores and a wholesale business. While our medical stores have performed very well, the real growth driver will come from the opening of our three adult use stores and the increased wholesale demand that comes from other adult-use stores that are finally starting to open in the greater Boston area. Two of our adult-use stores are currently in the regulatory approval process, and we hope to open them in Q2. Also, our final Massachusetts cultivation expansion is starting the regulatory approval process, which can take some time. So as of today, we expect sales from this cultivation facility expansion in Massachusetts to begin in the fourth quarter. In New Jersey, we're hopeful to begin adult use sales in Q2, and we are in as good a position as any other operator to be ready to add adult use to our three stores, the maximum number of stores any operator can have in New Jersey. Additionally, we are only waiting on regulators to open our 75,000 square foot cultivation facility, possibly the best facility we've ever built. Switching to Florida, We just passed the one-year anniversary of our acquisition of Liberty Health Sciences, a business that we've said from day one has great potential but needs work in order to reach that potential, namely cultivation improvement, increased product variety, and store expansion. To put in context where we started with Liberty, a year ago we had very irregular supply of flour, limited product variety with no edibles, limited strain diversity, a testing failure rate of 25%, and 31 open stores. Since closing Liberty last year, we've opened 14 new stores, bringing our current store count to 45, almost a 50% increase in the number of stores. And we anticipate continuing to open stores in 2022 on a similar pace to 2021. As we all know, Florida municipalities will only want so many dispensaries, and our team has secured prime locations. In terms of increased product variety, we've focused on expanding our selection of vapes, concentrates, and edibles, introducing origin extracts, secret orchard fruit-forward vapes, sun gems fruit chews, and Big Pete's cookies. Today, we have 68 unique strains under cultivation at our Gainesville campus, about half of which are available across our Florida stores today. The increased product variety, especially in edibles, has become a major draw to our Liberty Health Sciences dispensary. Flower is still an area for improvement, though. To start, our cultivation team has placed a major emphasis on refreshed, expanded genetics and plant health. These initiatives have made a big impact on yields. While a typical harvest in Q1 2021 was about 650 pounds, today a typical harvest is coming in nearly double that at 1,200 pounds. But this is still not enough flower. We have nearly doubled our monthly revenues in Florida over the past year. but part of this has had to come from wholesale flower purchases, which the regulator will allow you to do from time to time. This demonstrates our ability to drive sales at our Florida stores, but obviously at a lower margin while our cultivation is still getting where it needs to be. To produce more and better flower, we're bringing more power to our cultivation facility. We recently added 40% more power capacity to our Florida cultivation site, and we're looking to quadruple that power capacity within the next year with future adult use in mind. We also have work to do on our 20 acres of hoop houses, where temperature fluctuations and gains, though, led to a false start this season. We've begun to replant the hoop houses with a new strategy that's better suited to the local environment, and we will have results to harvest in Q2. With all that said, we've still increased cultivation production by nearly 100% over the last year. In 2021 and into 2022, we have taken on a lot as a team and continue to make real progress. As John discussed, the build-out and regulatory approval process has been delayed even more than we ever anticipated. But the build-out is 95 percent done, and with the regulatory approval process, it's a matter of when, not if. And our in-place operational assets have proven resilient during these times of slower market growth. The earnings power is there and in line with our initial expectations when we began this transformation a year ago, but it is delayed compared to what we expected. We'd like to give you concrete expectations for 2022, but given the uncertainty in regulatory timelines, we believe it's more prudent to point to the earnings power of our business once the assets are online. In particular, once we've received regulatory approvals for adult use sales and cultivation expansions in both Massachusetts and New Jersey. That earnings power is an annualized run rate of $250 million of adjusted EBITDA and $800 million of revenue for Q4, assuming we get these regulatory approvals early enough in the second half. We expect financial results in the first half of 2022 to be relatively flat, in line with industry trends. We expect a step function of growth beginning in Q3, subject to the timing we discussed, with the runway earnings power of the business online in Q4.
spk06: Michael Heaney Thank you, Jen. We've come a long way in a short period of time. There's still a lot of work to be done, but we remain positive on the earnings power of AIR. We spoke a lot today about building and bringing online facilities. But building is just one aspect of operating a company. The talent we have attracted to AIR and the systems that we put in place will enable us to build the company that we all know AIR has the potential to be. Regardless of pricing, inflation, delays, or whatever the market decides to throw at us next, We continue to put the customer first and focus on what's inside the box because we believe that quality will always win out. Thank you all for being on this journey with us. We will now take questions.
spk01: Thank you. We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2. We will pause for a moment as callers join the queue. Our first question comes from Matt McGinley of Needham. Please go ahead.
spk05: Thank you. So with your front half guidance expecting revenue to be relatively flat, you'll have new assets that come online in Illinois. You'll have more stores in Florida. You have the Arizona cultivation, Levia, new dispensaries in Massachusetts. My question is, are you broadly seeing a decline in overall revenue in the first half of the year in your existing assets that will be offset by these new operational assets? Or are you just being more conservative in the guide given what you're seeing overall with the market trends?
spk02: Hey Matt, it's Jen. Thank you so much for the question. I think the very high level answer is we are looking to be conservative reflecting industry trends that I think everyone who has reported so far has echoed for the first half. We do expect additional assets to come online throughout mostly Q2. But again, the timing of those is somewhat uncertain and we have been looking to be conservative in the indication of first half flat guidance.
spk01: Our next question. We also, sorry, go ahead. Please continue. No, let's go to the next question. Our next question comes from Scott Fortune of Roth Capital Partners. Please go ahead.
spk07: Good morning and congratulations on the improvements made in Florida on the production side. Just want to kind of unpack that a little bit of where you think you can, how far along are you on those improvements? Obviously you're, you're making changes there and continuing to improve the production level outside. How, how should we look at that coming on board in the, in the, you know, 2022 time period from here, from that standpoint?
spk02: Thank you so much, Scott. We're really pleased with the productivity in Florida. Our team has worked extremely hard to open those stores and extremely hard to improve the productivity in our cultivation site in order to feed the stores. To your question, how far along are we? With the doubling nearly of our cultivation productivity, we absolutely feel like that's a great result, but there's plenty more for us to do. When we took over the business on a yield per square foot basis, we were looking at sort of 25 grams per square foot. That number in our most recent harvests has been closer to 80. which is an incredibly strong result and one that we're really proud of, and we want to make sure we can keep going throughout the growth cycle of 2022, at which point we will be self-sustaining in terms of vertical integration in Florida.
spk01: Our next question comes from Andrew Semple of Echelon Capital Markets. Please go ahead.
spk09: Hi there, and thanks for taking my questions, and congrats on the fourth quarter results. Just a comment. There was a comment in the prepared remarks on gross margins improving along with biomass being delivered, which is a clear driver for the business in 2022. I'm just giving your comments on the timing delay. Could we get a refresh and a summary on the updated timings for getting products or new cultivation capacity to market in states where you are supply constrained, namely Massachusetts, New Jersey, and Florida, as well as if you could touch on Arizona.
spk02: Sure. Why don't we start with gross margin? And I think, Brad, why don't you talk about a little bit of our gross margin discussion?
spk03: Yeah. So in terms of Biomass generating improvements in gross margin, that's definitely a second half of the year story, primarily Q4. I think what you'll see in Q1 is actually a bit of a dip in gross margins. A lot of the compression that we saw was in Q4. In Q1, we've seen that kind of settle out, but now it's a full quarter of those lower prices in Q1. So you might see a bit of a dip there, still north of 50% in adjusted gross margin. And that'll be probably consistent for the next three quarters until Q4 we have some biomass upside through gross margins.
spk01: Our next question comes from Matt Bottomley of Canaccord Genuity. Please go ahead.
spk08: Good morning, all. Thanks for taking the questions. Just going back to the outlook provided for run rates for the end of this year, just curious on EBITDA and your previous outlook, you provided a range where at the high end it would be a margin range of closer to 38%. So sticking with the low end of the range here on a run rate basis at 31%, just curious if there's any more color on what specifically has changed, whether it's the wholesale pricing pressures that you've mentioned or any other considerations as to your outlooks on margin, and then just as a quick follow-up to that, how that sort of leads into the continuation towards generating positive free cash flow as your overall margin profile is expected to be higher than where it is today going into 2022. Just wondering if there's any other trends to note in that progression.
spk02: Sure. Thanks so much. I'll start with the general guidance, and then I'll let Brad talk a little bit about our free cash flow. In terms of The way we think of that $250 million, first and foremost, we are trying to be conservative. We want to make sure that the wholesale price changes that we've seen over the last couple of quarters are reflected in those numbers and that those numbers are very much achievable in our conservative modeling. So we are, as you say, sticking to that bottom end of the range.
spk03: And then in terms of cash flow, 21 was definitely an investment year for us. Between CapEx and M&A purchases, it's about $220 million that we spent in cash flow. 22 will be less than half of that. So in addition to improved operating cash flow, we're going to have less uses for CapEx and M&A as well.
spk01: Our next question comes from Russell Stanley of Beacon Securities. Please go ahead.
spk04: Good morning, and thank you for taking my question. Just on your Boston area stores, can you remind us what approvals are still outstanding and related to that, how many additional Boston area stores you expect to open over the next year or so by third parties? Thank you.
spk02: Sure. Thanks so much, Russ. So we're so close, but it's so hard to handicap exactly when stores this inspector will come and that report will be finished and therefore what cannabis control commission meeting will get on to be approved and then after that there's one more final inspection um but literally we're in we're at the 10 yard line uh maybe the five yard line we're so close um and we do we're we're just we're very hopeful that q2 is sufficient the stores are 100 ready to go we're just waiting for those regulatory approvals Sorry, you asked a question that's an important question. Apologies about the number of stores elsewhere in Boston. Greater Boston should have 40 to 50 overall adult use dispensaries over time. I think we are fairly close relative to others, but you do see two, three, five, adult use dispensary approvals on every Cannabis Control Commission meeting when those happen once a month. So we do expect to get closer to that 40 to 50 over the next three to four quarters.
spk01: Our next question comes from Owen Bennett of Jefferies. Please go ahead.
spk00: Morning, guys. Hope all well. I just wanted to get an understanding of how you're thinking about M&A into new states or overall now. Obviously, your share price has taken a bit of a hit. Has this impacted thinking here or have target prices also come down? And then linked to this with scale looking like it's becoming increasingly important, would you consider a merger with another MSO if the opportunity arose? Thank you.
spk02: Hi, Owen. Thank you so much for your question. I think we've been very public historically about saying that We do believe our footprint is an excellent footprint today at eight states. We do think that there are some additional states that could be additive to our footprint, and maybe that means getting to 12 or 15 states over time, but we've also been very public in saying that the bar is very high for taking on new M&A activity and that We will always be looking for the right asset at the right price with the right team, and we will continue to do so, but the bar is high.
spk01: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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