Ayr Wellness Inc

Q3 2023 Earnings Conference Call

11/16/2023

spk04: 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.
spk00: You may begin. Good morning, everyone, and welcome to our third quarter 2023 earnings call.
spk02: 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.
spk03: Thanks, David, and good morning, everyone. Q3 sales of 114.4 million represents an increase of 5.7 million, or 5%, compared to prior year sales, and a decrease of 2.3 million, or 2%, from prior quarter. The year-over-year increase was primarily driven by retail growth of 6%, primarily from Florida improvements and expansion, along with the ramping of New Jersey adult use, offsetting the impact of price compression and increased competition across the remaining retail states, with wholesale largely flat year over year. On a sequential basis, there was a 2% decline in retail and wholesale respectively, primarily driven by modest price compression, including approximately 5% in New Jersey retail. Retail transactions overall continue to increase each quarter, up another 5% sequentially and 27% year over year, offsetting dollar per ticket compression of 7% and 17% respectively for the same periods. Q3 gross profit of $48.1 million represents an increase of $2.5 million or 5% compared to prior year and a decrease of 15% compared to prior quarter. Q3 adjusted gross profit, a non-GAAP measure, with $60.5 million representing an increase of $3 million or 5% year-over-year and a decrease of 12% quarter-over-quarter. Q3 adjusted gross margin of 53% represents a sequential decrease of approximately 630 basis points driven by a reclassification of expenses from SG&A to COGS, explaining approximately half of the decline, with the balance largely driven due to the effects of price compression. Internal sourcing at retail remained high at 70% overall and 52% when excluding Florida. Loss from operations was $1.5 million, which represents an improvement of $18 million and $3 million compared to prior year and prior quarter, respectively. Total SG&A costs represent a decrease of $12 million or 23% compared to prior year and a decrease of $8 million or 17% compared to prior quarter. SG&A as a percentage of sales was 34% during the quarter, down from 47% and 40% in prior year and prior quarter, respectively. Approximately 300 basis points of the improvement is due to the reclassification of expenses from SG&A to COGS in Q3, with the balance driven by cost-saving initiatives and further steps to streamline operations. Q3 adjusted EBITDA of $28.4 million represents an increase of $9.7 million or 52% year-over-year and a decrease of $1 million or 3% quarter-over-quarter. Adjusted EBITDA as a percentage of sales increased year-over-year by 800 basis points to 24.9%, which was roughly flat with prior quarter. Maintaining adjusted EBITDA at the 25% level keeps us in line with our target this year with our year-to-date adjusted EBITDA representing an industry-leading $33 million increase year over year. Moving to the balance sheet, we ended the quarter with a cash balance of $73 million, representing a $13 million increase from prior quarter, primarily driven by a record $20 million of operating cash flow during the quarter, as well as the upsizing of our Gainesville Cultivation Facility mortgage in July, contributing a net $14 million of cash proceeds. This was partially offset by $10 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. We generated free cash flow for the quarter, assuming $20 million of operating cash flow net of $7 million of CapEx spend. Year-to-date operating cash flow from continuing operations represents a $54 million improvement over prior year. We anticipate ending the year with positive operating cash flow, but acknowledge this may be partly driven by the timing of tax payments. And looking forward to 2024, we anticipate positive operating cash flow for the full year on a tax-adjusted basis and expect to generate positive free cash flow for the full year. From a balance sheet and liquidity standpoint, the top priority going into this year was to address our debt maturities, which were heavily weighted to 2024, with nearly $400 million of debt scheduled to mature by December 24. This included resolving, terminating, and amending various forms of debt, including earnouts, mortgages, seller notes, and senior secured notes. Upon closing of the transaction support agreement announced earlier this month, which is subject to court approval in Canada as well as certain state regulatory approvals in the U.S., we will have deferred nearly all of our maturity payments by two years. providing the company runway ahead of any industry catalysts. Proforma working capital adjusted for the closing of the transaction would swing our working capital positive, and that is before considering the $40 million of incremental capital that was committed as part of the agreement, which further de-risks and strengthens our liquidity position. And we expect the transaction to close around year end. Given the current capital market conditions, there is a price paid for this runway. in the form of 25% of the issued and outstanding shares on a fully diluted and pro forma basis, and after assuming the exercise of the anti-dilutive warrants. With clear runway, the business can now solely focus on operations and doubling down on our optimization plan. And if rescheduling and 280E relief occurs as anticipated, our annual tax expense would decrease by approximately $50 million, transforming the cash flow profile of the business. allowing the company to pay down debt and reduce annual interest expense, which is a top priority. This, coupled with the prospect of adult use in Ohio, Pennsylvania, and Florida, will result in us being in a position to achieve significant deleveraging. With that, I'll now turn it back to David.
spk02: Thanks, Brad. I recently celebrated my one-year anniversary of joining AIR and the cannabis industry overall, and 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've made meaningful progress on our operational and financial goals, as evidenced by the year-over-year revenue growth, adjusted EBITDA margin strength, and generating positive cash flow from operations. A lot of progress. But there remains a lot of work to be done, and I'm excited for George to join us to accelerate progress on the operational side of the business. We remain confident in our highly strategic footprint, which stands to gain significantly from state-level legislative catalysts. And having now taken comprehensive actions to improve our financial health, we've provided AIR with years of runway to capitalize on these opportunities, with our entire focus on making AIR a retailer of choice and a house of soaked-after cannabis brands. Operator, We'll now open the call up for questions.
spk00: We will now begin the analyst question and answer session.
spk04: To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. Analysts are asked to limit themselves to one question and one follow-up and then return to the queue if they would like to ask more. To withdraw your question, please press star, then two.
spk00: We will pause for a moment as callers join the queue. First question comes from Andrew Semple of Echelon Capital Markets. Please go ahead.
spk08: Good morning, and thanks for taking my question. First one here, I just want to triangulate on, I guess, the Q4 guidance, which is going for a flattish quarter on the consolidated basis relative to Q3, despite the $4 million to $6 million of headwinds you're expecting in Florida. Does this mean that you're expecting the rest of the portfolio to experience a $4 million to $6 million quarter-over-quarter step-up? And where do you think some of those major growth drivers might be coming from?
spk02: Hey, good morning, and thanks, Andrew. Yeah, so we're guiding to being flat on Q4 and have that impact on Florida, that 4 to 6 million impact on Florida. There's a few places where we see momentum and growth. I would say one is the ramp-up of the wholesale business in Massachusetts as we're ramping up the facility and the capacity. So for Massachusetts, it's Right now, not a matter of demand. It's a matter of having the supply for the demand that we have for our products. So that's one that for us is a growth vector for the fourth quarter. I would say the Ohio is both on the retail side and wholesale side. We just opened the first two stores. We're opening the third store tomorrow. And at the same time, we're ramping up the wholesale activity in Ohio. And say the third one is on the wholesale activity in New Jersey, where we're ramping up the production to be able to serve more wholesale on New Jersey. So I'd say those three are probably some key highlights that offset that temporary setback in Florida.
spk08: Great, that's great color and glad to hear many of your core markets continue to grow on an organic basis. Maybe just returning to the Florida issue on the cultivation side. First of all, have you identified the root cause for that issue and what actions have you taken to hopefully ensure that this doesn't happen again or at least too frequently in the future?
spk02: Yeah. So the answer to that is yes. We had an issue late summer at the time of extreme heat in Florida. We had an issue with power and an issue with the backup of the power. So that has been clearly identified. That created extreme heat, I would say, in the garden for a few hours. That has been identified. Actions have been already taken to ensure that it's not happening again. I'd say next summer, so it's something that we've already taken care of and that we've taken the actions to ensure that it's not happening. It impacted somehow Q3 as we disclosed it's going to impact more Q4, but we expect that to be taken care of and not impacting at all Q124.
spk00: The next question comes from Matt Bottenley of Canada Genuity.
spk04: Please go ahead.
spk07: Good morning, everybody. I wanted to turn back to New Jersey and some of the commentary you had in your prepared remarks just with respect to the market dynamics. I'd say overall in this earnings season, it's been largely constructive in terms of what we've heard from that market. Obviously, we're waiting for more retail stores to open to fully grow the TAM, but when it comes to your pricing experiences in that market, can you maybe break it down by what you're seeing in the wholesale versus pricing at the retail side, and then your general feel for the cadence of new store openings in that state into 2024?
spk02: Yeah, so I would say on the retail side, what we've experienced in Q3 and what we're seeing is some price compression on retail in New Jersey. I mean, it's one of the, say, a couple of markets with Florida where we're seeing some, I'd say, high single-digit, I would say, in the price compression. At the same time, on our side, as we shared, we have expanded our It's In Town store, and we're very happy with the layout and the customer experience that we're creating in that store. So I would say that we were able to offset or balance the price compression in New Jersey with the fact that we increased transactions in all stores, and especially in that store. Yes, some price compression, which we think is something that will continue to your point with the opening of the new dispensaries in the state, but we've been able to maintain market share thanks to the Intenton expansion and the work that's been done from the retail efforts. On the wholesale side, I mean, we've been increasing our revenue on that side and have seen some compression on pricing as well there, but that's been offset and more than offset by the increase of our supply, I would say, on the wholesale side.
spk07: Okay, thanks for that. And then just my other question, kind of more of the crystal ball question, but it's something that comes up on all these earnings calls, so it's just good to get management thoughts on, you know, if we do hear, let's say, for example, the DEA come out tomorrow and say, you know, they're recommending a Schedule 3, is there anything actionable on your part or from, you know, a legal perspective, like from that point going forward with respect to getting the ball rolling on perhaps the elimination of 280E? Or what are the steps that would be necessary in order for this actual cash savings to come in, which is, you know, getting a little more topical as of late?
spk03: Yeah, and we're waiting on that news. Obviously, that would be great to get 280E relief with rescheduling, and as I mentioned in the prepared remarks, would totally transform the cash flow of the business. Until that happens, we're kind of just staying tuned in terms of the different strategies that some of our peers have announced. We're staying informed, but no change in 280E strategy from us at this point.
spk04: The next question comes from Russell Stanley of Beacon Securities. Please go ahead.
spk01: Good morning, and thanks for taking my question. Maybe first on New Jersey, the state enacted legislation a little while back that allows operators to take minority stakes in additional retail locations. Just wondering, is that a priority for you? And if so, can you update us on your progress there and how you're thinking about that rollout?
spk02: Thanks for the question. So at this point, we have one partnership with the library, which is a minority-owned licensee dispensary that should open pretty soon. So there's one that we have that we're working very closely with, and we're looking at what the other options. I mean, at this point for us, it's also a matter of making sure that we allocate our capital in the right places. But that's something that we're looking into and having some connections with at this point. So one that is happening and we're looking at other options.
spk01: Great. And maybe moving to Massachusetts, you called that out as a wholesale there, as a driver looking into Q4. Can you update us on how your wholesale penetration looks now and where your priorities are. We've talked in the past about wholesale penetration in terms of number of doors versus share of wallet with existing doors. And any color you can provide on the progress you're making there would be really helpful. Thank you.
spk02: Sure. So at this point, we're looking at, I'd say, both, but more on the increasing the number of doors. That would say increasing the volume with each door. knowing that at this time we're in a ramp up time for our capacity in Massachusetts from a cultivation standpoint. We have a brand new facility that has opened a few months ago and we're in the process of ramping up. So at this point, I'd say it's more supply constraints on our side than really having to find for more demand. That said, we have a long way to go in terms of penetration to new doors in Massachusetts, which makes us confident in that we will have the demand as we ramp up capacity.
spk00: The next question comes from Scott Fortune of Roth MKM.
spk04: Please go ahead.
spk02: Yeah, good morning and thanks for the questions. Just want to kind of continue focus on the retail segment. We saw transactions up nicely, 18%. You mentioned customer acquisitions and the loyalty initiatives you put in place. Can you step us through on a state basis how that's ramping up? And then just can you unpack the different levers that are driving the transactions higher? um to you know offset um or in that continuing to continue offset the pricing pressure on that side of things hey uh just to make sure scott what you're asking is is what are the the levers that we're using to continue to increase um customer transactions is that right correct Correct. You mentioned you highlighted customer acquisition and loyalty issues you put in place. Just kind of follow up on continuing to build that out and what's really driving those transactions. Yeah, so I think there's a few things in there. The first one is very much on the work with our workforce and our book vendors and ensuring that – We're really working on building relationships between the booktenders and the customers. That's a key thing for us in this industry, I think, in continuing to grow those relationships and growing the transactions that we're having with existing customers. There's also work being done across the different states on improving customer acquisition. whether it is from a digital standpoint and CRM standpoint or whether it is from visibility of the locations. One example I would give for anyone that goes in Boston is to take a look at the facade of the Back Bay store in Boston and seeing the efforts that were done there for increasing the visibility. And then the work that's being done behind the scenes for now but on completely changing our loyalty program and creating a new loyalty program, which will come in place more in Q1 and Q2 of 2024. And then the last thing I would say that is forward-looking, not on the actions already taken, but forward-looking, is that relaunch of our key brands that will also give us a chance to speak more and to connect with our customers. So I'd say... Backwards looking, it's very much on the work with the bartenders and creating the relationships to work on customer acquisition, either physically or digitally. And then forward looking, I would add the loyalty program and the work on the relaunch of the brand. Got it. Appreciate that. And then just probably for Brad, but can I focus on providing a little color on, you know, you're expecting a 25% kind of adjusted EBITDA margin range given take here. But can you add a little more detail on the drivers? You've done a lot of vertical integration. Did we get more out of that? Is this more cost efficiencies? or kind of not discounting pricing as much, especially in Florida? Just kind of a little bit of a framework for continuing that 25% adjusted EBITDA margin that you're targeting for now.
spk03: Yeah, no, I'm happy to take that one. So, there are, you know, several drivers. One is, you know, understanding the reclass that we made between COGS and SG&A. So, Our mid-50% range target for gross margins will fall by a few points, but we're going to maintain 25% because that's clearly an accounting reclass. No change to the bottom line there, really, except for taxes, and we're expecting potentially $3 million to $4 million of upside there in terms of annual tax savings from that reclass. Aside from that, you know, it's also focused on the cost savings, which has been a real, you know, culture sort of company culture shift in terms of finding and identifying cost savings and allowed us to realize these improvements in SG&A gradually each quarter. So I think, you know, looking at the gross margin puts and takes and then also the work that we're doing on the cost savings side in SG&A allowed us to maintain that 25% range going forward.
spk00: The next question comes from Jesse Redmond of Water Tower Research. Please go ahead.
spk05: Good morning, guys. Looks like you had some good progress on OpEx. Can you talk about how this is evolving in 2024 and how much leverage you might be able to get there?
spk03: Yeah. And, you know, I kind of just mentioned that SG&A and OpEx savings has been a big focus for us, you know, over the last year and a half, I'd say, especially. And we continue to dig for more opportunity there. I think on a relative basis, we're still a young industry, young company. And so we know that there's still further optimization to be had. But we're going to need to dig deeper and sort of see more gradual opportunity there over time. So we've been very committed there. I think you're going to see more gradual improvement in terms of savings, but then also more leverage kick in as we see sales growth in 24 and you know, improvement as SG&A as a percentage of sales.
spk05: Thanks. And the Kiva launch is exciting. They've built a strong brand where I am in California. Can you talk a bit more about the timing of that launch and how that might impact margins?
spk02: So, hey, yeah, good morning, Jesse. Thanks for the question on Kiva. So we're excited on the partnership of Kiva and the launch of Kiva in Florida. did a first batch very recently as we launched the Camino products of Kiva and that was extremely well received by our customers. We want to be, at the same time, very careful on how we're ramping up so that we make sure that the quality and the consistency of the products correspond to both, I'd say, the expectations of air and the expectation of Kiva. And so that ramping is happening as we speak. And we're very excited about the launch, very excited about, I'd say, the reception by our customers. It will have a slight impact in Q4 from a revenue standpoint, but we expect that to have a very significant impact in Q1 24 and for the year 24. As a reference, I would say that Edibles in general represent only 5%, 45% of our mix in Florida, whereas we know that the market is way higher than that in Florida and that we have the potential to grow that way beyond 10%, probably at 15% of our mix if we project to later in 24. And to your point, that is with a significant margin on this. So very excited about the launch. and we think that's going to have a really good impact in 2024.
spk03: And I'll just add on the margin side, edibles we see as roughly two times the price of alternative oil products. So from an economic standpoint, a lot of upside there.
spk00: The next question comes from Federico Gomez of ATB Capital Markets.
spk04: Please go ahead.
spk06: Hi, good morning. Thank you for taking my questions. First question is just on the, if you could provide a little bit more color on how do you view the opportunity there in Illinois? So we have two new stores that are planning to open there, but they're not vertically integrated in the state. So if you could just remind us how do you view that market and what's the strategy? Thank you.
spk00: Hey, good morning, Federico. Thanks for the question.
spk02: So yes, today our footprint in Illinois is two stores in Quincy. And we're planning on opening two stores in the Chicago area in, I'd say, mid-year 2024. This is, I'd say, for 2024, the extent of what we think we will do in Illinois. And Illinois is a market where we want to take the time to really think through potential vertical integration, other stores, but we don't consider that a key priority for 2024, considering capital constraints and where we want to put our efforts. So we're excited to launch those two stores by mid-year, but we don't have plans so far to go beyond that, I would say, for 2024.
spk06: Thank you for that. And then my second question is just on Ohio. I guess internally, you know, what is the expectation that you're working on in terms of the actual start of adult use sales? And do you foresee any sort of challenges for the program there to ramp? And then I guess on the pricing side, ahead of adult use sales, do you expect to see some pressure in Ohio as, you know, other operators maybe increase production investments, you know, ahead of that catalyst? Thank you.
spk02: Yeah, so obviously we're super excited with Ohio and excited with the vote that recently happened. On our side, we're doing two things right now. The first one is the opening of those three stores that will be for the next few months in a medical market. So we're excited about the launch, but at the same time, not expecting those stores to have huge volumes until we turn into adult. But for us, that's a focus on launching those three stores and making sure that we're ready here. And then at the same time, we continue to ramp up the cultivation in Ohio. So we're ready from a capacity standpoint, but we're only at 20% capacity so far. Utilization, not capacity, of that facility. So that's a focus for us on being ready. Too early for us to talk about truly what we can think from the price compression, especially on the retail side. And even I would say on the wholesale side, pretty new or young in that market. But really the focus is on launching those three stores, ramping up capacity, and at the same time preparing for additional stores as we go into adult. So that's very much the focus that we're having for 24 for Ohio.
spk00: This concludes the question and answer session.
spk04: I would now like to hand the conference back over to David Gibere for any closing remarks.
spk02: Yeah, thanks everyone for being here and for the questions. Very short, I'd say, closing remarks or conclusion here is taking a step back and I would say from a higher view. And when I look at where we are today, I'm going to highlight three things. The first one is It's a major achievement for us to be in a place where we now have a runway until 2026. And that changes a lot, I would say, on the future of this company. And that's, I think, a massive achievement to be here. The second one is we said that we would focus this year on becoming leaner, becoming more efficient, and improving our EBITDA margin. Now we're two quarters in a row at 25%, and we anticipate to continue to be at 25% or better on that front, which shows that we've been able to become leaner and become more efficient as an operator. And then what excites me when I look at the future, and we talked a bit about it, is I like very much our footprint. When you look at the states that we're in, I think we shared the numbers saying that we have out of 88 stores, 15 only that are in adult markets. which means that the potential is six times as Ohio, Pennsylvania, Florida move into the adult market. So all this really gives us a lot of confidence on what we can achieve and the future of the company.
spk00: Thank you. This concludes today's Air Wellness Conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-