Ayr Wellness Inc

Welcome to the AIR Wellness second quarter 2023 earnings call. Joining us today are AIR's president and CEO David Goubert and the company's CFO Brad Asher. Before we begin, we would like to remind everyone that certain comments from management during this presentation may contain forward-looking statements based on management's expectations. These forward-looking statements are provided for illustrative purposes only and are not intended to serve as and must not be relied on by you as a guarantee assurance, prediction, or definitive statement of fact or probability. Many of these risks and uncertainties are discussed in our most recent public filings, including our most recently filed Annual Information Forum and Management's discussion and analysis. Numerous risks and uncertainties could cause the actual events and results to differ materially from the estimates, beliefs, and assumptions expressed or implied in these forward-looking statements and might not be expressed today. Several of the factors that will determine AIR's future results are beyond the ability of AIR to control or predict. In light of the uncertainties inherent in any forward-looking statements, you are cautioned against relying on these statements. While AIR may elect to update these forward-looking statements at some point in the future, AIR specifically disclaims any obligation to do so. During this presentation, we may reference non-GAAP financial measures such as adjusted EBITDA and adjusted gross profit. For a reconciliation of our non-GAAP measures to GAAP results, please see our earnings release posted in the investor relations section of our website earlier this morning. I will now turn the call over to AIR's president and CEO, David Goubert. You may begin.

Good morning, everyone, and thank you for joining the call today. We're proud to walk you through our second quarter, which represents a meaningful step in AIR's journey to generating cash flow with significant year-over-year improvements in revenue, adjusted EBITDA, gap loss from operations, SG&O optimization, and expense management. Throughout today's call, we'll discuss AIR's continued progress in these regards via updates to our optimization plan, our growth forward plan, our customer-centered approach, and our financial and balance sheet health. Beginning with our Q2 results, we grew revenue 18% year-over-year, and adjusted EBITDA 79% year-over-year, improved our gap loss from operations by 81% year-over-year to a loss of 4.5 million, excluding discontinued operations. We experienced a modest sequential revenue decline while achieving 12% sequential growth in adjusted EBITDA, beating our Q2 adjusted EBITDA guidance. And our adjusted EBITDA margin of 25.2% represents a further expansion over Q1, which is ahead of schedule, as we expected to achieve 25% adjusted EBITDA margin by the end of 2023. These significant improvements to profitability metrics can be largely attributed to the execution of our 2023 optimization plan, a plan designed to optimize air cash flow and cash position. As a reminder, the optimization plan focuses on four key areas. First, our sales growth, leading to improved operating leverage. I will lay out shortly the foundation for growth that we've been implementing in recent months. Second, expense reductions, which are reflected in our results as we're generating improved SG&E margin and adjusted EBITDA margin in 2023. our stronger gross margin, which are also reflected in our results, their increased operational efficiency, improved internalization, skewer rationalization, more efficient purchasing, pricing optimizations, and discount management. And finally, unlocking working capital via better inventory management, where we still have opportunity ahead of us to make a great impact during the second half of 2023. In Q2, We experienced the full benefit of headcount actions taken in February 2023 reflected primarily in gross margin as that workforce worth sizing was focused on the grow and make aspect of our business. At the same time, we continue to see improvements in our cultivation operations with a percentage of packageable flour increasing approximately 23% in the second quarter compared to our last year average supporting further that improvement in gross margin. Further workforce actions were taken in early July, specifically targeting SG&A, resulting in the month of July in a 28% year-over-year increase in transactions per labor hour, which is a key retail KPI for us. Due to those actions, we expect SG&A as a percentage of sales to decrease further into three results and beyond, as AIR tightly manages expenses and revenue increases throughout the next few quarters, providing stronger operating leverage. To further unlock working capital, we are planning to tap into our inventory more aggressively, which we see as a significant resource for cash generation. It is for this reason that we are maintaining our expectation for adjusted EBITDA margin in the mid-20s for the remaining of the year due to expected margin pressure from further inventory depletion efforts offset by our expense savings and optimization efforts. In each market, we intend to continue to keep our production right size to demand while selling through aging inventory and realizing further synergies between our grow-make operations and retail, wholesale, and purchasing. On the revenue front, we continue to implement our grow-forward plan. which provides the foundation for further revenue growth in the second half of the year and beyond. While I will detail where we are in each market in a few minutes, I want to highlight a few new key elements of our growth strategy. As I become increasingly accustomed to AIR and our contemporaries in the industry, I've had the opportunity to experience firsthand what makes AIR unique. One of my key takeaways is the personalized approach taken in air cannabis dispensary across our footprint, being the neighborhood store that is part of the community at scale. The interaction between our bartenders and our customers are among our best attributes. And as an individual coming from a customer-centric retail background, this is something I'm thrilled to see. As AIR continues to make progress on its existing foundation in its retail experience, e-commerce, customer loyalty program, and digital ecosystem, this personalized neighborhood approach will remain at the center of how we approach our customer relationships. This provides us with the best opportunity to build long-term loyalty and lifetime value among our customer base. This type of customer loyalty at retail is designed to provide air with a platform to better introduce and proliferate our CPG portfolio, which we are in the process of simplifying and relaunch in coming months. And then experience true synergies between these two aspects of our business. From our market standpoint, we are pleased to be in a position where we have diversified catalysts on the horizon to drive both short-term and long-term revenue growth opportunities. To name a few, three retail locations to open in Ohio, expecting all three before the end of the year. Larger output from existing Massachusetts cultivation to fulfill wholesale demand. The introduction of Kiva products in Florida this fall. Further store opening in Florida, and accelerated ramp-up of the 10 new stores already opened this year, the continued growth in New Jersey, including the expansion of Eatontown, which was completed this month, the build-out of two Connecticut stores by early 2024, and the build-out of our two additional retail licenses in Illinois by early 2024. The build-out of these growth catalysts is mainly hitting our 2023 CapEx budget that remains unchanged at $30 million for the year. More broadly, potential for adult use legalization looms in Florida, Pennsylvania, and Ohio. While we're focused on growing our business in the current environment without relying on these catalysts, we are preparing our operations to be ready when these windfalls take place. Turning now our attention to AIR's balance sheet, while Brad will provide the specifics, I would like to highlight the fact that we remain laser-focused on improving the short- and long-term financial health of AIR. I am pleased with the progress that we have made in recent months. The announced actions during Q2 and subsequent to Q1 have resulted in the extension of the payment terms of $53 million of debt obligations the opportunity to defer an additional 69 million of debt obligations if certain contingencies are met, and the resolution of what could have been a significant near-term dilution event for shareholders related to our GSD New Jersey acquisition. As a reminder, AIR has engaged Mollis & Company as its financial advisor to advise the company on pursuing extensions of future debt maturity. At this time, we cannot provide further information on this topic. However, we look forward to progress updates in the future. I'll now turn the call over to Brad to walk us through the financials for the second quarter of 2023 before I share a bit more details per market.

Brad? Thanks, David. Q2 sales, 116.7 million, represents an increase of 17.8 million, or 18%, compared to prior year sales of 98.9 million and a decrease of just under 1 million or 1% from prior quarter. The year over year increase was primarily driven by retail growth from Florida improvements and expansion, along with the ramping of New Jersey adult use, offsetting a wholesale business that is roughly flat year over year. Retail sales increased 1% sequentially, but were offset by a 13% decline in wholesale. primarily driven by greater than expected demand in Massachusetts wholesale during Q1, leading to a shortfall of sellable flour in Q2. Additional capacity is now online in Massachusetts with current wholesale revenue expected to surpass Q1. We will continue to fine-tune the S&OP process to respond to the ever-changing landscape in Massachusetts. In retail, transactions continue to increase each quarter, up 6% sequentially and 46% year over year, offsetting dollar per ticket compression of 5% and 15% respectively for the same periods. And same store sales for stores open greater than 12 months were roughly flat quarter over quarter and up 8% year over year. Q2 gross profit of $56.6 million represents an increase of 20.6 or 21% compared to prior year. and an increase of 8.4 million or 17% compared to prior quarter. Q2 adjusted gross profit, a non-GAAP measure, with 69 million representing an increase of 17.5 million or 34% year over year and up 3.8 million or 6% quarter over quarter. Q2 adjusted gross margin of 59% is ahead of our expectations for the quarter of maintaining in the mid 50% range and was primarily driven by cultivation improvements and cost optimization efforts, including actions on headcount taken in the first quarter, providing us with a more efficient base going forward. In addition, internal sourcing remained high at 69%, with a healthy 50% when excluding Florida from this metric. Loss from operations was 4.5 million, which represents an improvement of 19.2 million or 81% compared to prior year and 17.2 million or 80% compared to prior quarter. This represents a significant improvement driven by the expansion of gross margin and overall efforts to reduce expenditures with total SG&A costs down 5 million or 10% sequentially. SG&A as a percentage of sales was 40% during the quarter, down from 48% and 44% in prior year and prior quarter respectively. Q2 adjusted EBITDA of 29.5 million, an all-time high, represents an increase of 13 million, or 79%, year-over-year, and up 3.2 million, or 12%, quarter-over-quarter. Adjusted EBITDA as a percentage of sales increased year-over-year and quarter-over-quarter by 850 basis points and 280 basis points, respectively, to 25.2% in Q2. The sequential improvement was largely due to cost-saving and margin optimization measures taken throughout the first half of the year. Moving to the balance sheet, we ended the quarter with a cash balance of $60 million, and subsequent to quarter end on July 7th, closed an upsizing of our Gainesville Cultivation Facility mortgage, contributing a net $14 million of cash proceeds, resulting in a pro forma cash balance of approximately $74 million. Cash payments during the quarter include $10 million due under the GSD earn-out, $7 million of principal debt pay-down from scheduled amortization and maturities, as well as $7 million of CapEx payments, keeping us on track for the estimated $30 million of total CapEx for the year. Operating cash flow from continuing operations remained positive year-to-date, totaling $2.8 million of cash, provided which represents an improvement of $34 million from prior year. We expect further improvement through 2023 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. In addition, in Q1-23, we filed for the employee retention credit, totaling $12.3 million, and as of Q2, we are still anticipating receiving this incremental cash. Strengthening the balance sheet and preserving cash is the number one focus of the company, and we've been busy on that front. In January, we reached an agreement to mutually terminate the acquisition of Dispensary 33, preserving the purchase price consideration of $55 million, including $12 million of cash. In March, we divested the Arizona business, resulting in over $20 million of cash proceeds and the elimination of $22.5 million of debt and any potential earn-out contingent consideration. In May, we reached an agreement on the GSD New Jersey and Sierra Naturals earn-out amendments which defers approximately $28 million of cash obligations through 2024 and averted a potential substantial equity dilution. And we also announced that we retained Mollison Company LLC as our financial advisor. In June, we reached contingent agreements to defer principal or amortization payments for two years on an aggregate principal amount of approximately $69 million of debt obligations, contingent on an extension of the maturity of our senior notes. And most recently in July, we closed the $40 million refinancing and upsizing of our Gainesville cultivation facility mortgage, resulting in $14 million of net proceeds and marking our second such mortgage upsizing of the year, totaling $24 million of an aggregate net proceeds. Each deal respectively with long-term maturities and an attractive cost of capital of roughly 8% currently. At the same time, we've been making similar efforts on the operations side. aimed at the same goal of preserving cash and strengthening the balance sheet, including the headcount reduction of over 400 positions over the course of the year, excluding Arizona, together with the optimization efforts that have resulted in improvement across the board on key financial metrics. Looking ahead, we are positioning AIR for sustainable long-term growth and profitability across all our markets, while prioritizing the financial health of the company. The recent actions we have taken to grow our Florida footprint and production capability expand our Eatontown store in New Jersey, and build out a retail footprint in Ohio are intended to enable us to accelerate forward-looking growth, followed by additional growth milestones as Connecticut comes in line and we seek to double our Illinois retail footprint through strategic partnerships. We continue to expect revenue and adjusted EBITDA growth in the second half of the year and into 24, and to generate positive cash flow from operations for calendar year 2023. With that, I'll now turn the call back to David.