Ayr Wellness Inc

Welcome to the AIR Wellness, Inc. fourth quarter and full year 2022 earnings call. Joining us today are AIR's president and CEO, David Goubert, and the company's CFO, Brad Asher. The company will discuss forward-looking matters on this call, including targets for revenues and adjusted EBITDA. This forward-looking information is subject to the assumptions and risks as described in the company's management discussion and analysis for the quarter and year ended December 31st, 2022. As well, we remind you that adjusted EBITDA is a non-GAAP measure. We refer you to the reconciliation to GAAP measures and other disclosure concerning non-GAAP measures contained in AIR's management discussion and analysis for the quarter and year ended December 31st, 2022. I will now turn the call over to AIR's President and CEO, David Goubert. You may begin.

Thanks everyone for joining today. I am excited to be participating in my first earnings call as CEO of AIR, and I would like to convey my appreciation for John Senneman and our board for placing their trust in me to lead this organization and build upon its great foundation. I want to thank our team for strong results on our fourth quarter, beating expectations by growing our adjusted EBITDA 20% sequentially, having a second straight quarter of being operationally cash flow positive and increasing our same store sales quarter over quarter. I also want to share my appreciation to our team for adjusting so quickly to new leadership, embracing new ideas and priorities, and already making tangible progress on the critical few initiatives that we've laid out to drive sustainable growth and improve the financial health of our company. and I am excited by how much opportunity exists in front of us. Let me start by addressing a few of our key objectives. The first one is to grow cash from operations and consistently be in a strong capital position. And the second one is to clearly position AIR as a retailer of choice and a house of brands, setting ourselves up for stronger growth and a more profitable future. Starting with cash flow, our goal is to generate positive cash flow from operations in 2023. This is a core component of looking after the financial health of our business. We are focused on growing into our balance sheet, and we are also focused on addressing the maturity of the December 2024 senior secured notes, which is a key focus for our business today. To improve profitability and cash flow from operations, we're executing our 2023 optimization plan, which includes four key components. The first one is higher sales, leading to much improved operating leverage. The second one is expense reduction, where we intend to achieve significant savings in 2023 through a recent right-sizing in our workforce and additional actions to reduce our SG&A and other operating costs. Achieving stronger margin is our third component. This will be achieved through internalization, secure rationalization, purchasing and pricing optimizations, and an improved wholesale business. And lastly, Our fourth component is unlocking working capital via better inventory management, including implementing a stronger supply chain organization, selling through existing inventory, and rightsizing our production in oversupplied markets. This is why we've placed such an emphasis recently on prioritization, investing deeper into markets and activities that align with our core business goals while stepping back from those that do not. To that end, since our last conference call, we have already begun to execute on our plan with several key actions, including the termination of our acquisition of Dispensary 33 in Chicago, the proposed sale of our Arizona assets, investment into establishing a vertical footprint in Ohio, and continuing to build depth in Florida with new store openings. Moving now to our second key objective, we seek to establish ourselves further as a retailer of choice and a house of brands, focusing on three key assets, our loyal customer base, the high quality of our products, and the equity of our brands. Across our retail footprint, we're emphasizing customer acquisition, retention, and frequency with the intention of building strong customer relationships and gaining their long-term loyalty. At the same time, we're making significant changes behind the scenes that are just as impactful. This includes organizational changes across the organization to align our teams to our key priorities, recruiting key talent to complement our existing teams and, where appropriate, bringing in expert third parties to support our strategy, as well as initiating a review and rationalization of our CPG brand portfolio. This is designed to allow us to better leverage the benefits of being both a retailer and a house of brands, where a loyal customer base can fuel the growth of our brands and powerful brands can help drive customers into our stores. Florida is a great example to see this approach in action. We've invested in acquiring customers and are working on developing more meaningful relationships with them via our improved menu and stronger customer experience. This is illustrated by an 88% year-on-year increase in transactions from Q4 2021 to Q4 2022, significantly outpacing the 28% growth in store counts. We've brought in new customers, captured significant share in a priority market, and maintained strong margin through low-cost production. The relationships we're building and the loyalty we're developing with them will allow us to optimize pricing over time and increase our customers' lifetime value. Now, zooming out for a moment, We're happy to report that AIR continued to generate solid transaction growth throughout its footprint in Q4 2022, where the total number of transactions were at 9% quarter-over-quarter. And while top-line revenue doesn't fully reflect this due to continued pricing pressure in some markets, this increase in number of transactions confirms AIR's ability to continue to scale. We are winning customers, introducing them to AIR's portfolio of brands, and giving ourselves the opportunity to build loyalty, leading to sustainable and healthy growth in future quarters and years. I'll now turn the call over to our CFO, Brad Asher, to walk us through the Q4 and full year 2022 financials.

Thanks, David, and congratulations. I'm excited to be working closely with you in your new role. Full year sales of $465.6 million represents an increase 108 million or 30% from 2021. Approximately half of the increase was driven by growth in Florida, led by substantial improvements in cultivation and the expansion of our Florida retail footprint, ending the year with 53 stores compared to just 31 at the beginning of 2021. Additional drivers of growth came from the adult use conversion in New Jersey and a full year contribution from our Pennsylvania footprint, which was just coming online during the course of 2021. This is partially offset by the impact of price compression and the tightening of the wholesale market, which had an outsized impact in Massachusetts, Nevada, and Arizona. Fourth quarter sales increased 5 million or 4% sequentially. 124.6 million, primarily driven by retail growth in Florida and New Jersey, with the balance for other markets relatively flat on retail and down slightly on wholesale. Overall retail transaction count increased 9% quarter over quarter, which was partially offset by a decrease in basket size of 3% on average. From a same-store sale perspective, sequential sales increased 3% in stores that have been open for at least 12 months. Full year gross profit was $190 million and a gross margin was 41% compared to $138 million and 39% in 2021. Full year adjusted gross profit was $248.5 million and adjusted gross margin was 53% compared to $207 million and 58% in 2021. The 500 basis point decrease in adjusted gross margin year over year was primarily due to the impact of price compression, which started over the course of 21 and accelerated in 22. This was partially offset by shifting more of our products through our retail channel, which increased full-year retail sales from internal product from 44% to 57% of retail sales. Fourth quarter adjusted gross profit was 70.5 million, with the adjusted gross margin of 57%, the highest since Q4 of 21, and at least 450 basis points higher than any other quarter in 22. Eighty-nine percent of revenue came from retail sales during the quarter, with a further shift of internal product sold to our retail channel, accounting for a record 65% of retail sales, which is 900 basis points above the previous high realized in the prior quarter. Absent Florida, which requires vertical integration by state law, our internal brands represent just 47% of Q4 retail sales. Internalization percentage has been consistently building each quarter during 22. And while the fourth quarter represents a significant increase to this metric, we do not feel this represents a ceiling and expect this to continue to increase throughout 23 as we continue to improve the quality, and distribution of our internal brand portfolio. Based on the current market conditions, including the impact of price compression, the company incurred a non-cash goodwill impairment charge $149 million, reducing the carrying value of goodwill across all reporting units. This led to a full-year loss from operations of $243 million compared to $56 million in 2021. Full-year adjusted EBITDA of 86.8 million represents a decrease of 11% from 2021. Fourth quarter adjusted EBITDA of 26 million represents a sequential increase of 20% exceeding our guidance of 10% sequential growth with adjusted EBITDA increasing sequentially in each quarter during the year. Adjusted EBITDA as a percentage of sales represents 21% in Q4 relative to 18% for the first three quarters of the year. Assuming there continues to be modest price compression from current levels, we anticipate adjusted EBITDA margins expanding to approximately 25% in the second half of 2023, driven by cost-saving measures, ramping sales, and overall improvements and optimization. The company is hyper-focused on cost savings, with every business decision being viewed through the lens of a cost-benefit analysis. Moving to the balance sheet, we ended the year with a cash balance of $80.6 million, which was a decrease of 20% from the prior quarter. The decrease was driven by the timing of debt amortization and interest payments in Q4. Operating cash flow was positive at $500K, representing the second quarter in a row with positive operating cash flow and marking a significant improvement over the first half of the year. We expect further improvements through 23, and expect to have positive operating cash flow for the full year, although there may be quarterly swings through the lumpy nature of working capital outflows such as tax payments. We anticipate limited uses of cash for both CapEx and M&A during 2023. While cash used from investing activities, primarily CapEx and acquisitions, totaled over $286 million over the past two years, We expect no greater than $30 million for CapEx in 2023 for strategic high ROI projects, including increasing our Florida store count and continuing to invest in Florida cultivation improvements. In addition, we anticipate cash use for financing activities will be at least partially offset by our pipeline of real estate financing opportunities. Maximizing cash is a company-wide priority, as evidenced by the recent announcements around Illinois and Arizona which in aggregate are expected on closing to represent an additional $32 million in cash to our balance sheet. Looking ahead, the company expects sales and adjusted EBITDA in Q1 of 23 to be in line with Q4 of 22. We anticipate further ramping in revenue, adjusted EBITDA, and cash flow in following quarters as the actions David outlined in our 2023 optimization plan demonstrate their impact. We continue to be optimistic about the future of our industry and the countless opportunities and catalysts embedded within our footprint, including our recent partnership wins in Connecticut and Ohio, as well as the prospect of adult-use conversion in three of our markets. To position ourselves to capture growth from these upcoming catalysts, we're prioritizing the financial health of the company by looking to make the right decisions on capital allocation, including M&A, CapEx, and cost savings. which are expected to further strengthen our balance sheet and capital position. With that, I'll now turn the call back to David. Thanks, Brad.