Ayr Wellness Inc

Welcome to the AIR Wellness Third Quarter 2020 Free Earnings Call. Joining us today are AIR's President and CEO, David Gubert, 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 factor probability. Any of these risks and uncertainties are discussed in our most recent public filings, including our most recently filed annual information form 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, AIR 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 AIRS President and CEO, David Guibert.

You may begin. Good morning, everyone, and welcome to our third quarter 2023 earnings call.

I'm excited to share the progress we've made this quarter in building our revenue foundation becoming a leaner and more efficient operator, and cleaning up our balance sheet. Before we discuss Q3 results, I would like to touch upon our recently announced agreement to defer debt maturities. Upon closing, these actions will help to ensure the viability of the company and advance AIR's ability to see through optimization efforts put in place this year. They will also bolster AIR's ability to benefit from the potential federal and state-level catalysts on the horizon, including rescheduling and the adoption of adult use programs in states where AIR has a solid and scalable vertically integrated position, such as Ohio, which recently passed an adult use ballot initiative, as well as Florida and Pennsylvania in the near future. For additional perspective, we have 88 retail locations across our footprint today. And all of those 88 stores, only 15 of them are fully ramped adult-use stores. With legislative catalysts in Florida, Ohio, and Pennsylvania, we would see our adult-use retail footprint increase by nearly six times, making AIR, in our view, one of the best positioned MSOs to capitalize on these opportunities. Coming back to the debt deal, These debt agreements were the culmination of a series of actions taken in recent months, which, upon completion, will result in the maturity of nearly $400 million in debt being extended by an additional two years, in addition to $22.5 million of debt that was retired in connection with the Arizona OSS sale earlier this year. And now, with no meaningful debt maturities until 2026 and $40 million of new money financing, We view AIR as having one of the clearest financial runways in the industry for the coming years. These extensions provide us the needed runway to sustain top-line growth and cash flow generation in the years ahead, with or without the benefit of broader macro catalysts. And while we appreciate the financial flexibility this gives us, we remain laser-focused on the financial health of the company and will continue to prioritize cash flow generation and further optimization initiatives within our forward-looking plans. Moving to our operations, we continue to execute our initiatives during the quarter, leading to further improvements across key profitability metrics while laying the foundation for AIR's long-term revenue growth. Diving into our Q3 results, We grew revenue by 5% year-over-year, improved adjusted EBITDA by 52% year-over-year to our target margins of 25%, which represented a 770 basis point improvement, demonstrating the progress we've made on our operational initiatives. Further, we generated over $20 million in cash flow from operations during the quarter, representing the best quarter of operating cash flow since air inception. On a sequential basis, which reflect the same asset base as prior quarter, revenue declined 2% due to price compression in select markets like New Jersey and Florida. We also faced temporary cultivation challenges in Florida that impacted our dispensary inventory levels, which I'll discuss shortly. Our profitability improvements are in large part attributable to the continued execution of our optimization plan. we are focused on four key elements. Higher sales to improve operating leverage, expense reduction, stronger margin, and unlocking working capital by better inventory management and production right-sizing. We'll touch on sales shortly, which brings us now to the next component of our optimization plan, continued expense reduction. Our SG&A margins for the quarter decreased 600 basis points on a sequential basis and more than 1,200 basis points year-over-year to 33.9%. About half of the sequential improvements, or 300 basis points, was due to certain expense reclassification from SG&A to cost of goods sold, which Brad will detail shortly. However, the rest of our SG&A improvement was due to tangible optimization and efficiencies now embedded in our cost structure. We expect to drive further operating leverage in 2024 as we realize revenue growth and maintain our disciplined approach to expense management. Third, improving gross margin. Although we did not realize stronger gross margins in this quarter, this was in large part due to the expense reclassification and on a normalized basis, adjusted gross margins would have increased year over year. We believe there is further room for gross margin improvement through continuing our efforts on better purchasing, pricing optimization, and brand enhancements. And finally, unlocking working capital through inventory management. We continue to drive down inventory during the quarter as reflected by a 9% reduction in biomass compared to Q2. However, the recent expense risk classification also impacted the value of inventory on the balance sheet, which is offsetting the display of our working capital improvements. We will continue to drive down inventory in markets where it makes sense, but more broadly, the inventory we carry is overall healthier and fresher. We believe that we have the right production capacity in place across our footprint, and we are even ramping up production as necessary to meet demand in certain markets. We will continue to better realize synergies between our grow-make operations and our retail, wholesale, and purchasing units moving forward. As mentioned earlier, we grew revenue 5% year-over-year, but saw a modest decline sequentially, driven largely by press compression and an inventory shortfall in Florida towards the end of the quarter. The inventory shortfall occurred due to crop loss stemming from extreme heat and exacerbated by a mechanical issue at our Gainesville facility in late summer. Florida revenue will be further impacted in the fourth quarter before bouncing back in Q1 of 2024. We have planned investments and made managerial changes to ensure that this issue is not repeated. Despite the cultivation headwinds, we continue to execute on our retail initiatives. In Florida, for example, customer acquisition was up 8% sequentially. And across the rest of our footprint, new customer acquisition has been robust as we exhibited an all-time high this quarter in retail transactions, representing 18% year-over-year growth on the same store basis. And while this improvement was offset by pricing pressure, it is a predictive signal that our initiatives to drive customer acquisition and retention are working. Due to the modest sequential revenue decline in Q3, coupled with a temporary Florida cultivation setback, which we expect to impact Q4 revenue by approximately $4 to $6 million, we no longer anticipate growth for the second half of 23 over first half levels. We expect revenue to be essentially flat in Q4 compared to the third quarter and to maintain an adjusted EBITDA margin of 25% in the fourth quarter. Looking forward, we continue to target revenue growth in 2024. To touch upon a few original drivers, we are pleased to note the opening of two retail stores in Ohio, which makes AIR vertically integrated in the state. We plan to have our third store open tomorrow. Meanwhile, our 58,000 square foot Ohio cultivation facility is operational and equipped to produce approximately 40,000 pounds of biomass to meet future adult use demand in the state. In Massachusetts, we continue to see wholesale step up every month and we expect this to continue ramping as we anticipate elevated wholesale demand in the future stemming from continued store growth and our additional cultivation capacity. We also implemented various changes to our retail structure, including expanded store hours and new bundles aimed at increasing basket size. In New Jersey, The growth we're experiencing in our recently expanded Intentown store is allowing us to maintain market share despite the opening of new licenses throughout the state. And our wholesale business continues to gain momentum as we develop relationships with the new licenses and increase our capacity. Longer term, we continue to plan for further store openings in Florida, albeit at a slower pace. given our emphasis on enhancing the efficiency of existing stores. Growth catalyst for 2024 in Connecticut and Illinois, where we remain on track to complete the build-out of two stores in each state by mid-year next year. And preparing for conversion to adult use in Ohio, which has already packed adult use, and Pennsylvania and Florida, which we expect to follow. In our brand portfolio, we continue to make progress on our rationalization efforts and more efficient investments in our product offerings. We are in the process of relaunching our brand portfolio, comprised of four key brands, which include Kind, Haze, Later Days, and Levya. We anticipate these relaunches beginning in early 2024. That said, in strategic markets where it makes sense, we can and will bring new brands to market. As an example, Our medical patients in Florida have been asking for more options in the edibles category, and we recently announced an exclusive licensing and retail agreement to bring Kiva confections to our network of Florida dispensaries. Turning to the development of our customer base, our efforts in further developing our customer base are evident in our transaction growth and same-store sales growth, and we're implementing actions to further grow our customer loyalty. During the quarter, we made significant progress in developing our newly designed customer loyalty program, AirBuzz, to help drive retention and incentivize frequent visits. This loyalty program is quite different than the traditional point accrual discount program seen in cannabis and borrows from the worlds of airlines and hospitality while providing hard and soft benefits to retain our loyal customers. We look forward to launching this program throughout early 2024, further establishing the air dispensary brand and embedding our business in the communities that we serve. On the product quality front, on one hand, we've made meaningful progress on product quality, particularly in better defining our internal quality standards to reach better consistency across our portfolio. However, we have further to go on this front in making sure the quality of the products we're producing consistently reaches the standards that we are setting for ourselves. Our primary aim is to achieve a combination of quality and consistency that will give our refreshed brands the platform they need to thrive. We've recently made changes to our operations and supply chain team to ensure we reach our potential here, which I'll speak to in a moment. Ultimately, Our employees are the backbone of the business, and we remain committed to hiring and retaining the best talent and developing a team that can deliver on our key objectives. Over the course of the year, we've implemented and refined our organization structure to empower our market GMs to own the comprehensive P&L of their states while working alongside functional leaders and departments across our supply chain. This has enabled AIR to drive operating efficiency across the business while establishing the foundation to scale as needed. And as noted in our press release this morning, I am very pleased to announce the hiring of George DiNardo as AIR's new Chief Operating Officer. George brings extensive industry experience to the role and joins AIR from ColumbiaCare, where he most recently served as SVP Regional Operations. George will be responsible for overseeing all levels of the operational supply chain. I'll now turn the call over to Brad to walk us through the financials for the third quarter of 2023.