Ayr Wellness Inc

Welcome to the AIR Wellness fourth quarter and full year 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 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 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 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 welcome to our fourth quarter and full year 2023 earnings call. I'd like to thank the entire AIR team for their execution of our financial and operational goals throughout the year delivering record revenue, record EBITDA, and outpacing the industry in the growth of key profitability metrics. 2023 was a transformational year for AIR, and while there remains significant work to be done, I am proud of what was delivered. When we gathered for our 2022 year-end call, we had only recently completed the transition of key senior leadership at AIR, and outlined the core objectives that we sought to achieve throughout the year. For 2023, those objectives included growing our revenue base, enhancing our profitability metrics, including cash flow from operations and adjusted EBITDA, resolving the balance sheet overhang of our 2024 debt maturities and earn-outs, and ensuring AIR is poised to capitalize on future industry catalysts. First, on a full year basis, we grew revenue 10% from 421 million in 2022 to 464 million in 2023, primarily from retail growth in Florida and both retail and wholesale growth in New Jersey, as well as continued improvements in customer acquisition and retention, as demonstrated by a 29% increase in total transactions in 2023 versus 2022. Through greater operating efficiencies and cost reductions, We grew adjusted EBITDA by 51% year over year to $114 million, with EBITDA margin expanding from 18.6% in 2022 to 25% in 2023, which represented amongst the top EBITDA growth and margin improvements among major cannabis operators. We also generated $24 million of cash flow from continuing operations in 2023. Importantly, We expect to maintain 25% adjusted EBITDA margins in 2024 and believe we can achieve further operating leverage as revenue scales. With the extension of our 2024 senior secured notes, now complete as of February 7th, 2024, we have deferred or retired nearly 400 million in debt maturities over the last year. With no meaningful maturities until 2026, 40 million of gross proceeds in new financing, and additional proceeds expected to come from the recent warrant issuance, we view AIR as having one of the clearest financial runways over the coming years. These extensions enable continued optimization efforts and should ensure that AIR participates in the exciting catalysts that we believe are coming at both the federal and state level. With only 15 of AIR's 91 retail stores operating in adult use markets today, we believe AIR has the highest relative exposure of any MSO to the recreational opportunities on the horizon in Ohio, Florida, and Pennsylvania. Ohio has already passed adult use, and we expect this market to be up and running by Q4 of this year, while we anticipate Florida and Pennsylvania will transition to adult use in the near future. With 64 dispensers in Florida and further plans to expand our presence, we are well positioned to tap the potential six billion adult use cannabis opportunity in the state, as well as the two to three times revenue growth opportunity that we anticipate from Ohio and Pennsylvania adult use without materially increasing our fixed cost base. As such, we anticipate another step function in operating leverage as revenue growth accelerates in each of those markets following the critical adult use conversions. And federally, the potential for rescheduling represents a significant unlock of cash flow for air via the elimination of the onerous and unjust 280B tax treatment. Moving on now to a few of our 2024 goals, a set of initiatives is already underway that we look to execute and improve upon throughout the year, and those are improving our product quality, consistency, and variety, further streamlining our supply chain, continuing to rationalize and strengthen our CPG brand portfolio, and further establishing the air retail brand and improving customer loyalty. On improving product quality and consistency, personal and structural changes in operations and supply chain with the arrival of Chief Operating Officer George Nardo have led to faster execution, stronger SOPs, and increase productivity across those aspects of our business. Additionally, we've placed a major emphasis on optimizing genetics across our network of cultivation facilities to increase yields while also increasing the overall commercial appeal of what we grow. This process is well underway utilizing multi-factor decision making that optimizes our genetic mix for yields, tax percentage, variety and novelty in terpene and Canada wheat profiles, and other key commercial factors. Next, I'd like to speak to how we're further streamlining our supply chain. The personal changes in operations have provided AIR with a stronger supply chain platform to build on throughout 2024, enabling our ambition across CPG brand building and retail. We're implementing process efficiencies and skew rationalization across our facilities to better leverage our inputs. This means producing more derivative products like improved gummies with minor cannabinoids, live raisin and rosin concentrates, infused pre-rolls, and other infused products. This approach lowers our overall cost per pound with more efficient use of our grow space and further expands the product selection for our new cross-category CPG brand strategy. Additionally, we're undergoing a modest CapEx build-out to further scale kitchen space across our facilities to increase efficiency and innovation. This allows us to produce more high-quality edibles at cheaper input costs and gives us a platform to be more innovative in developing new products across edibles and other infused products. This also allows us to make more efficient use of cultivation and processing space, allocating a larger portion of those facilities to high-margin infused products like edibles. Moving on now to our efforts to rationalize and build our CPG brand portfolio. We've done most of the work in rationalizing and rebuilding our brand strategy, going from 12 brands to building around two core brands, Kind and Haze, complemented by regional sub-brands. We're now entering the launch phase. We plan to use those moments on the cultural calendar like 420 and 710 as key tent poles to reintroduce these brands and we'll be pursuing an aggressive launch timeline leading up to them. We plan to use 27 new and rebranded SKUs prior to 420 across Kine and Haze and another 33 between 420 and 710. The launch plans for our Rationalized Brands portfolio will also focus heavily on retail and wholesale activations, supporting adoption and sell-through of our brands. This will be especially prevalent in markets like Massachusetts, New Jersey, and Ohio, where we have strong expectations for wholesale expansion in 2024. Finally, touching upon how we further establish the AIR Retail brand and improve customer loyalty. We continue to harmonize under the Air cannabis dispenser retail brand, providing us with name recognition that we did not have under the fragmented legacy store names. With that consistency in place, we've been able to build a new loyalty program, Air Buds, and we expect to launch the V1 of our customer-facing app in early Q2 2024, allowing us for more tailored communication to our customers. Within the stores themselves, We've invested in better training for our booktenders, focusing primarily on improving average dollar sale to offset price compression with larger baskets and better understanding the customer journey and the lifetime value of our customers. Our ADS from repeat customers grew 3.3% from Q3 to Q4 2023, and we continue to focus on this throughout Q1 2024. Now, before I turn the call over to Brad, I want to speak for a moment about the people and talents on our organization. Over the course of 2023, we worked diligently to build, optimize, and streamline a team that can deliver on our key objectives, while making tough decisions to right-size certain aspects of the organization. With that work behind us, We find ourselves in a much stronger position at the beginning of 2024 in both talent and efficiency. I'll now turn the call over to Brad to walk us through financials for the fourth quarter and full year 2023.

Thanks David, and good morning everyone. Full year sales of 464 million represents an increase of 42 million or 10% from prior year. The primary drivers for sales growth year over year came from two key markets, Florida and New Jersey. Florida was driven by further operational improvements and new stores ending the year at 64 stores compared to 53 at the end of 2022. New Jersey was largely driven by a full year contribution of adult use conversion and the gradual expansion of our wholesale business in the state, which has grown sequentially each and every quarter, starting with our first wholesale transaction in the state back in Q3 of 22. Growth in these markets was partially offset by increased competition and price compression, specifically in states like Massachusetts and Pennsylvania. Fourth quarter sales represent a slight increase of just under 1% sequentially, in line with our guidance to be sequentially flat in the fourth quarter, despite the approximate $5 million impact from Florida cultivation issues. With the exception of Florida, sales from every other market were either flat or up sequentially, with a key contribution from wholesale growth in the fourth quarter. Wholesale increased 41% quarter over quarter and increased as a percentage of sales to 15% compared to just 11% on average through the third quarter. Outside of Florida, retail was overall flat sequentially with a 2% increase in retail transaction count fully offset by a 2% decrease in basket size. Full-year gross profit was $202 million and gross margin was 44% compared to $175 million and 38% in 2022. Full year adjusted gross profit was $257 million and adjusted gross margin was 55% compared to $228 million and 54% in 2022. Adjusted gross margin maintained in the mid 50% range despite the price compression over this period due to the efforts in 2023 on cost control, margin optimization, and increasing the percentage of retail sales from internal products from 59% in 2022 to 68% in 2023. In addition, the shift in state mix had a positive impact on margins, with primary drivers of sales growth in 2023 being New Jersey and Florida. Fourth quarter adjusted gross profit was 62 million, with adjusted gross margin of 54%, representing a slight increase from prior quarter, despite the shift to wholesale in the quarter and the lower contribution from Florida, our highest margin state. We began to see recovery in wholesale pricing in Q4 of 23, which helped to maintain margins, driven by more finished goods and reduction in bulk sales, specifically in markets such as Pennsylvania and New Jersey. And on the retail front, managing inventory levels led to favorable pricing in Florida quarter over quarter. In addition, adjusted gross profit margins were maintained despite a decrease in the percentage of internally branded sales at retail, down from 70% to 64%, and excluding Florida, down from 52% to 44%, as internal product was diverted to meet increased demand in the wholesale channel. We expect this to return to the previous range by mid-year as we strategically ramp cultivation capacity in Massachusetts and New Jersey and expect to see further overall improvements in yields across our facilities as a result of process improvements in pre- and post-harvest. Full-year loss from operations was $37 million, representing an improvement from prior year of $170 million, driven by the $28 million increase in gross profit, as well as a reduction in SG&A and non-cash impairment of $35 million and $112 million, respectively. The reduction in SG&A includes expense reductions across nearly all key buckets including comp and benefits professional fees marketing t e and various other operating expenses full year adjusted ebitda of 114 million represents an increase of 39 million or 51 from prior year primarily driven by the year-over-year increase in adjusted gross margin coupled with significant expense reductions Adjusted EBITDA as a percentage of sales improved by nearly 700 basis points from 17.9% in prior year to 24.6% in 2023. Fourth quarter adjusted EBITDA represents an all-time high of 29.8 million, resulting in an adjusted EBITDA margin of 26% and a sequential increase of 5%, slightly exceeding our guidance to maintain an adjusted EBITDA margin of 25% in the fourth quarter. Moving to the balance sheet, we ended the year with a cash balance of 50.8 million. And after giving effect to the debt extension, which closed on February 7th, including the pro forma addition of the 40 million of new capital, our pro forma working capital position as of year end is a positive 30 million. With the closing of these transactions, we've officially deferred nearly 400 million of debt to 2026, leaving AIR ample runway to further improve operations and take advantage of industry catalysts. Full-year cash flow from continuing operations was a positive $24 million, an improvement of $57 million from prior year, driven by the previously referenced operational improvements and working capital management, and we expect to continue growing our operating cash flow in 2024. Cash used for CapEx decreased $31 million $8 million in 2023, and we expect this trend to continue with approximately $20 million of CapEx anticipated for 2024. From a tax perspective, we've been watching the latest industry developments very closely to inform our strategy as it relates to the application of Section 280E, which is an IRS code that limits the deduction of expenses to those directly related to the cost of goods sold, while our 2023 financials have been prepared subject to the limits of 280E consistent with all prior periods, we've been working very closely with our tax counsel regarding our legal interpretation of 280E. Based on this work, we anticipate updating our tax position to reflect the non-applicability of 280E and we'll be in a position to file amended tax returns for the years 2020 through 2022 before the end of this month. We estimate these amended tax returns will result in a refund claim in the range of 50 million for previously paid income taxes relating to 2020 through 2022, and we expect a shift in the majority of our outstanding tax liability, moving from current tax liability to an uncertain tax position within non-current liabilities, starting with our Q1 financials. Due to the uncertain nature of the tax position, we are not relying or depending on any future refund for cash planning purposes, and we'll still continue to make tax payments in the ordinary course absent the application of 280E on a go-forward basis. We continue to be optimistic about the future of our industry and the countless opportunities and catalysts embedded within our footprint, including the future conversion to adult use in 76 of our 91 stores, as well as the prospect of rescheduling and the outsized tax impact this will have on our operating cash flow. While we continue to do everything within our control to optimize the business, including the reduction of expenses, and shoring up our balance sheet, we were at the same time looking ahead, cautiously optimistic for the rapid growth and deleveraging that will take place with each catalyst. These near-term opportunities reinforce that we are in the right states at the right time. With that, I'll now turn the call back to David.