Ayr Wellness Inc

Welcome to the AIR Wellness, Inc. First Quarter 2023 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 assumptions and risks as described in the company's management discussion and analysis for the first quarter ended March 31st, 2023. As well, we remind you that adjusted EBITDA is a non-GAAP measure. We refer you to the reconciliation to GAAP measures and other disclosures concerning non-GAAP measures contained in AIRS management discussion and analysis for the quarter ended March 31st, 2023. I will now turn the call over to AIRS President and CEO, David Goubert. Please go ahead.

Good morning, everyone, and thank you for joining the call today. I continue to be impressed by the strong foundation we have built at AIR and what I've seen our team accomplish in my short tenure here. We have already begun to make progress on our operational and financial goals, as evidenced by quarter-over-quarter revenue growing by 3% and adjusted EBITDA growing by 9%. and posting our third straight quarter of positive cash flow from operations. From a year-over-year perspective, we grew revenue by 18% and adjusted EBITDA over 60%. I am pleased to report that our adjusted EBITDA margin reached 22.4% this quarter, against 21.1% in Q4, on our way to our target of 25% by end of 2023. I am happy to share that last week we announced an agreement to provide significant liquidity improvement for the next handful of years via amendments to contingent consideration for the acquisition of GSD New Jersey and Sierra Naturals, as well as resolving what otherwise would have been a potentially significant no-term dilution event for our shareholders related to our acquisition of GSD New Jersey. The agreements align with our goal of maximizing the financial health of the company and allow AIR to remain flexible as we continue to scale and optimize the business. Moving to our operations, we remain laser focused on improving the short-term financial health of the company through our 2023 optimization plan, while at the same time, driving long-term revenue growth and developing our key assets, which we are calling our Grow Forward Plan. I'd like to highlight the key elements of both our 2023 optimization plan and our Grow Forward Plan during our call today. The optimization plan, which outlines how we intend to drive short-term financial performance and cash improvement, includes four key elements. sales growth, which is expected to lead to improved operating leverage, stronger margins, cost reduction, and unlocking working capital with better inventory management. I'll talk more a bit later about the first element, the sales growth, as we review our state-by-state performance, but I'm glad to report that we grew sales 3% sequentially in Q1 during a largely soft quarter throughout the US cannabis industry. The second objective in our 2023 optimization plan is to improve gross margin across our footprint by enhancing our internalization rate, optimizing pricing and purchasing, reducing discounts, and creating better connectivity between our supply chain, retail, purchasing, and wholesale functions. A great example of these initiatives is in Nevada and Pennsylvania, where these key initiatives are already resulting in meaningful improvements to financial performance. In Nevada, for example, this was reflected by an 8 percent quarter-over-quarter improvement in adjusted gross profit dollar and 29 percent quarter-over-quarter improvement in adjusted EBITDA dollars, despite slight sequential revenue. And in Pennsylvania, despite top line decreasing low single digits quarter over quarter, we grew our adjusted EBITDA by almost 20%. These initiatives are benefiting from our new organization structure, where our market GMs have a 360-degree view on all state operations, boosting connectivity between different functional areas of the business. The third objective of our plan continually working to reduce SG&A and other operating costs, while deploying significantly reduced cap expense to the tune of $30 million for calendar 2023. We took several actions in the first quarter, including a right-sizing of our capacity and optimization of our workforce, and better leveraging our national platform to drive efficiencies and cost reduction. Quarter over quarter, adjusted SG&A as a percentage of sales has dropped from 37.1 percent to 33.1 percent. This only reflects the partial benefit from the cost-saving initiatives implemented in Q1, so we expect to see further improvement in SG&E margin throughout 2023. The last of our four key objectives in our 2023 optimization plan is to unlock working capital through better inventory management. We are actively reversing the trend of inventory and working capital built that we saw over the last few years as reflected by a 3 million inventory reduction quarter over quarter. As we shared in our last goal, considering the lead time in our industry, these actions take time to bring results, and we anticipate further reduction of inventory levels, particularly as a percentage of sales, throughout the year as we continue to execute our plans. Better inventory management is expected to lead to more cash on hand and improved cash flows. Moving now to our Grow Forward plan. Over the past few months, we have introduced to our teams and started implementing our Grow Forward plan, a collection of mid- to long-term initiatives aimed at driving strong revenue growth during the second half of 2023 and beyond, and developing our key assets which, aside from our team of talented individuals, includes our loyal customer base, our powerful brand, and the quality of our products. Some of these initiatives are already driving improved results, as reflected by the modest quarter-over-quarter revenue growth, despite broader industry softness. However, the majority of the benefits will materialize in the second half of 2023 and thereafter. The grow-forward plan includes rationalizing our brand portfolio and building equity in our CPG brands, developing our customer algorithm and upgrading our retail expertise and customer experience to drive loyalty, and improving product quality. The combination of these initiatives is designed to further cement AIR as a retailer of choice and a house of brands. across each of our markets over the medium to long term. To execute this plan, we've been highly focused on team and talent, building a team that can deliver on our key objectives. I am very pleased to share that we now have a new company leadership organization fully in place where we are pairing functional leaders with P&L owner in our individual markets to provide a 360 degree view focused on the health and growth of the company. To that end, I am pleased to announce some key new hires and promotions across the organization. Andy Cho, our Chief Digital and Marketing Officer, is focused on building a digital ecosystem around the customer journey, driving customer acquisition, retention, and loyalty, as well as building our CPG Brands portfolio. Kenny Stoll, our Chief Supply Chain Officer, is leading our efforts across operations to run lean and efficient while prioritizing demand planning and product quality. Alex Gonzalez-Burke, our VP of Retail Performance, is charged with improving the customer experience and driving customer loyalty through a continually improving retail channel with the goal of ultimately driving higher revenue per customer. We appointed four regional general managers via internal and external sources who will have full P&L ownership across their respective markets. And we realized multiple internal promotions and new hires across key departments, including retail excellence, client development, and supply chain, among others. Although it has only been a couple of months since our last conference call, I am proud of how our team is gelling together, the early progress made, and everyone's commitment to our 2023 Optimization Plan and our Grow Forward Plan. I'll now turn the call over to Brad to walk us through the financials for the first quarter of 2023.

Brad? Thanks, David. As a reminder, we closed on the sale of our Arizona assets on March 27th. with the P&L activity for the quarter netted against the loss from discontinued operations. Therefore, I will be speaking to results from continuing operations which have Arizona stripped out of both the current period and comparative period. Q1 sales, 117.7 million, represents an increase of 3.4 million, or 3%, compared to prior quarter sales, 114.3 million. slightly favorable to our guidance of flat revenue quarter over quarter. Sequential increase was primarily driven by improvement in our wholesale business, growing from 10% of sales to 12% of sales, along with further gradual improvement in retail, with retail transactions increasing approximately 4% quarter over quarter. Same-store sales for stores open greater than 12 months were roughly flat quarter over quarter, On a year-over-year basis, Q1 sales represents an increase of 18.2 million, or 18 percent, compared to 99.5 million last year, with the increase primarily driven by retail growth in Florida and New Jersey. Q1 gross profit was 48.3 million compared to 53 million in the prior quarter. Q1 adjusted gross profit, a non-GAAP measure, with $65.3 million representing a sequential decrease of $1.3 million or just under 2%. Q1 adjusted gross margin of 55.5% is in line with our expectations for the quarter of maintaining in the mid-50% range and was the result of a mix of both price stabilization and minor price compression in select markets. In addition, Margin pressure associated with inventory reduction efforts, most notably in Massachusetts, was partially offset by a further increase of internal branded retail sales, which reached 69% in Q1, up from 66% in Q4. Absent Florida, that same metric increased from 47% to 51% sequentially. Q1 adjusted gross profit represents an increase of 13.3 million, or 26%, versus last year, driven by the increase in sales as well as optimization efforts and the ongoing shift to internal branded retail products. Loss from continuing operations was 21.7 million in Q1, which is consistent with prior year. Q1 adjusted EBITDA of 26.3 million represents a sequential increase of 2.2 million, or 9%, ahead of our guidance to be flat quarter over quarter. Adjusted EBITDA as a percentage of sales increased 130 basis points to 22.4% in Q1, relative to 21.1% in prior quarter. The sequential improvement was largely due to cost-saving measures resulting in a decrease of adjusted SG&A expense, a non-GAAP measure, from 42.4 million in Q4 to 38.9 million in Q1. As David mentioned, adjusted SG&A as a percentage of sales improved from 37.1% in Q4 to 33.1% in Q1. Q1 adjusted EBITDA represents an increase of 10.3 million or 64% year-over-year. As a percentage of sales, adjusted EBITDA increased year-over-year from 16.1% to 22.4% driven by the expansion in adjusted gross margins as well as the reduction in adjusted SG&A. We anticipate EBITDA adjustments in future quarters will fall back in line with prior year trends as nearly half of adjustments within EBITDA Other in Q1 came from one-time severance payments. Moving to the balance sheet, we ended the quarter with a cash balance of $96.5 million, which is a sequential increase of $19.7 million, or 26%. The increase was driven by the net proceeds of $18 million from the Arizona sale and $10 million from the closing of a real estate financing transaction, which were partially offset by repayments of debt principal and CapEx, totaling approximately $14 million in aggregate. The real estate financing transaction was an upsizing of an existing mortgage with a community bank. which originally closed in Q1 of last year with a fixed interest rate of 4.625% and proceeds of 26.2 million. The upsizing represents another 10 million of proceeds with a fixed interest rate of 8%, with this interest rate applied only to the incremental proceeds. Operating cash flow from continuing operations was a positive 8.6 million, partially due to the work on inventory optimization contributing $3.3 million to operating cash flow. This represents the third quarter in a row with positive operating cash flow. 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 nonlinear trend of working capital outflows such as tax payments. As David referenced at the top of the call, we are pleased to announce the amendment of contingent consideration relating to both the GSD New Jersey and CIRA Naturals acquisitions. We think this is a great outcome for all stakeholders as it both defers approximately $28 million of cash pay obligations through 2024 and avoids the material amount of equity dilution. As it relates to the GSD New Jersey Earn Out Amendment, we also entered a contingent deferral of seller notes issued to the GSD New Jersey Seller's Rep at the time of acquisition. which would defer another $27.65 million of maturities for two years. The total two-year deferral achieved to date between the promissory notes and CERA earn-out amounts to approximately $55 million in the aggregate and preserves significant cash on the balance sheet, which is the company's top priority. In addition, we announced last week that we have engaged Mollis & Company to advise us on seeking further extensions of our debt maturities. Looking ahead for the second quarter, We expect sales and adjusted EBITDA to grow at a similar sequential growth rate as they did in Q1. We expect to further ramp revenue and adjusted EBITDA in the second half of the year and generate positive cash from operations for calendar year 23. With that, I'll now turn the call back to David.