Ayr Wellness Inc

Welcome to the AIR Wellness First Quarter 2024 Earnings Call. Joining us today are AIR's President and CEO David Gubert and the company 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. Many of these risks and uncertainties are discussed in our most recent public filings, including our most recently filed annual information form and management 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, we 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 ARIS President and CEO, David Gubert. You may begin.

Good morning, everyone, and thank you for joining our first quarter 2024 conference call. We're in the midst of an exciting and transformational time in the cannabis industry, as evidenced by the reported historic decision by the Department of Justice to propose reclassifying cannabis from Schedule 1 to Schedule 3. While the timeline for completion is uncertain, we are optimistic that the change to Schedule 3 will be implemented in 2024. This shift in federal policy represents a validation of the efforts AIR has made in building a long-term sustainable business within the cannabis space and provides further motivation to continue to improve and refine our operations so we're ready to continue our success in the next phase of the industry. AIR remains committed to doing our part to drive federal reform, as evidenced by our leadership roles in the U.S. Cannabis Council, Committee for Cannabis Scheduling Reform, and other initiatives pushing for federal and state-level reform. Pivoting now to our Q1, I would like to start by thanking the entire AIR team for their contributions this quarter as we continue to build upon the transformation efforts that we've put in place last year. In line with expectations, in Q1, we exhibited revenue growth and maintained our adjusted EBITDA margin target of approximately 25%. Importantly, we also generated free cash flow in the first quarter, which we expect to continue on a full year basis, given our previously discussed change in tax position around 280 and continued effort to further optimize our business. 2024 continues to be all about execution for air, further building on the progress we've made in 2023 in improving our operations in existing markets and seeking to ensure that we're ready to rise to the occasion when key step-level catalysts come into play. Diving into our operations, I will now touch upon key initiatives and progress across retail, CPG, wholesale, cultivation, and production. On the retail front, we continue to make progress in defining and rolling out the air cannabis dispensary brand. In June, we celebrate the one-year anniversary of our Florida stores rebranding to air cannabis dispensary, and we'll be hosting a month-long campaign across our Florida footprint to recognize this milestone. Additionally, we plan to rebrand our two existing Illinois stores to air later this month and open two more stores in Illinois in Q3 directly under the Air Cannabis Dispensary brand, followed by the conversion of our legacy Sierra stores in Greater Boston to the Air brand. By end of year, we anticipate all of our open stores to be under the Air brand name, with the exception of our locations in Nevada, which maintain strong brand recognition and loyalty under the dispensary brand name. As we unify our stores under the air cannabis dispensary brand, we seek to position our locations as the go-to local dispensary at scale across our market with stores that have common branding and common value proposition, but are deeply embedded within and reflective of their respective communities. To that end, we have focused heavily on ground game and community engagement activities to drive brand awareness and food traffic to our stores. We combine this with a strong digital focus, building around digital penetration and customer reachability. We find our best retail customers are often the ones that interact the most with our digital platforms. The traffic on our e-commerce websites remains strong, and we focused on improving the quality of the reach to our customers and the conversion on our sites. This means better leveraging things like our customer email and push notification getting customers to the product pages faster and with less friction. In-store, we've made improvements in basket size, slightly increasing the average basket each of the last two quarters after nearly two years of quarterly declines. This improvement has been supported by incentive programs implemented across all retail employees, and we feel average basket size represented a significant missed opportunity for AIR throughout 2023, But we're happy to say that we believe we have course corrected and are seeing positive results. Across our CPG portfolio, we have now concluded the phase of defining the DNA, identity, and architecture of our two core brands, Kind and Haze. And we continue to make strong progress on the relaunch of these brands in our own retail stores and across wholesale. We're building these brands to shift from single categories to full-sum brands that cross form factors and present a real personality and value proposition to our customers. We believe this approach to brand building will drive further customer recognition and adoption. In Q1, we launched the first ever edibles under the KIND brand with a launch of KIND gummies in Florida and Nevada. These gummies taste great with effect-based formulation leveraging THC, minor cannabinoids, and terpenes. We're thrilled with the response we're receiving and look forward to rolling these out across additional markets throughout the year. As 2024 progresses, we plan to roll out additional KIND skews with the expansion of vapes, tincture, and balms, and the introduction of KIND pre-rolls and pre-roll packs, providing KIND customers with trusted quality across all categories. With Haze, which we're positioning as a premium line for a more experienced cannabis consumer, we launched live rosin-infused pre-rolls across New Jersey, Massachusetts, and Nevada prior to 4-20, and have additional SKUs planned, including the introduction of live resin and live rosin gummies, as well as disposable live resin and live rosin vapes. The primary focus, as the year continues, will be driving sell-through of both kind and haze via further deployment of in-store displays, facilitating on-site pop-ups and merchandising opportunities with wholesale partners, participation in local community and industry events, and celebrating temple moments like the 10-year anniversary of Kind later this year. Personally, I'm really looking forward to seeing an abundance of the Kind Mango color in our stores and partner stores when that milestone rolls around. With our brand rationalization complete and the year-long relaunch is well underway, we continue to invest in our wholesale presence across our core markets. Consistent with our stated focus on 2024 wholesale segment expansion, wholesale continues to grow in terms of total dollars and as a percentage of our business quarter to quarter, and it's quickly turning into a strength for our organization. We're thrilled with the progress we've made in wholesale results and the process that's got us there. As a reminder, we put in place last year a system where market GMs work hand-in-hand with a centralized wholesale team and operation team. That system is now clicking and is the primary driver behind our success. We believe the relaunch of our brand, Partially Kind, will help drive further wholesale success in the second half of the year and beyond, with significant sell-through support from our marketing team. By the end of the year, we aim to have KIND make up more than 50% of AIR's total wholesale business. On our operations front, we continue to make progress in our standardization efforts, new product launches, and new product innovation pipeline. In particular, I'd like to recognize the agility that we've demonstrated in bringing new products to market, supporting the expansion of our KIND and Hays brands, enabled by expanded kitchen and extraction labs across our footprint. This is expected to progress even further as the year goes on, which should allow us to break further into higher margin product categories. From an inventory standpoint, we've not yet made the progress that we're hoping for, but we feel we have the right approach in place now to reduce inventory over the second half of 2024, specifically as it relates to streamlining operations to improve the speed at which inventory flows to our supply chain and into our stores. We believe that the operational improvements we've discussed will position us well to fully capture the opportunity presented by upcoming state-level catalysts. We continue to lay the groundwork for accelerated growth and further cash generation from the conversion of key markets from medical to adult use, with the next occurring in Ohio over the summer, as well as potential adult use conversions in Florida and Pennsylvania over the next year. We anticipate a mid-summer launch for Ohio adult use, but are not contemplating Ohio as part of our Q2 projections. With that timeline in mind, we are continuing to ramp capacity in our PowerMark cultivation facility to supply the adult use market while preparing the three air cannabis dispensary stores to convert to adult use promptly. This conversion would be an immediate tailwind for the existing stores, as well as our wholesale business. given our large and state-of-the-art Parma conservation facility, which has already developed a reputation among medical patients and wholesale customers for producing high-quality flower. And we are actively working on extending the number of locations to the maximum allowed within the first few months of adult use operations in Ohio. Across Florida and Pennsylvania, AIR has taken a more active role in state-level reform efforts making a significant contribution to the Smart and Safe Florida campaign and taking on a leadership role in the industry push for adult use legislation in Pennsylvania. In Pennsylvania, AIR maintains a robust footprint throughout operations and stores that is primed to convert to adult use if and when the moment comes, without the need for capex or material increase to our cost base. In Florida, we're actively working to improve our cultivation and production capacity and are pursuing a path to indoor cultivation expansion. From a store perspective, our team is laying the groundwork to maintain our store market share in an adult use regime, and we anticipate accelerating the opening of new locations following the November adult use referendum. We encourage everybody to support the campaign and vote yes on three. As I mentioned on our last call, only 15 of AIR's 91 stores currently operate in adult-use markets. We're in one of, if not the best, position MSOs to capitalize on impending medical to adult-use transitions, given our outsized growth potential relative to our current footprint. As we look to the rest of 2024, we remain laser-focused on staying true to our business model of being a retailer of choice and a house of soaked-after cannabis CPG brands. All of the actions that we've described thus far in today's call ladder up to that ultimate goal. I'll now turn it over to Brad to walk through the financial results before returning for closing remarks.

Brad? Thanks, David, and good morning, everyone. Q1 sales of $118 million represents an increase of $3.2 million or 2.8% from prior quarter and a modest increase of less than 1% from prior year. The increase in sales is in line with our guidance for the quarter, which called for revenue to range from flat to modest growth compared to Q4 23. We also outperform cyclical industry trends in the quarter, resulting in a slight uptick in overall retail market share. The sequential increase is a result of gradual improvement building back the sales base in Florida, modest growth in Ohio retail as our three recently opened medical stores continue to ramp ahead of adult use, as well as further growth in the wholesale channel, with 5% sequential growth building on a 42% sequential growth in the prior quarter. These gains were partly offset by compression in New Jersey retail, driven by the rapid increase in statewide store count. However, it's worth noting that overall revenue for the state of New Jersey increased sequentially, with wholesale growth more than offsetting the retail compression in the state. From a year-over-year perspective, the slight increase in sales was driven by wholesale growth partially offset by retail compression from same-source sales. At retail, transactions increased 1% sequentially and 5% year-over-year, and basket size increased 2% sequentially with 8% compression year-over-year, marking the second consecutive quarterly expansion of basket size after nearly two years of quarterly declines. Q1 growth profit of $50.7 million represents an increase of $1.3 million, or 2.6%, compared to prior quarter and 2.4 million or 5% compared to prior year. Q1 adjusted gross profit, a non-GAAP measure with 62.6 million representing a modest increase of 1% from prior quarter and a decrease of 2.7 million or 4% compared to prior year. Q1 adjusted gross margin of 53% was consistent with the past two quarters and represents a slight decrease of approximately 100 basis points compared to the prior quarter. as a result of modest price compression which is largely stabilized but persists in select markets such as New Jersey retail. Internally branded sales at retail were consistent sequentially with a slight decrease to 62% of total retail sales and 40% when excluding Florida. Consistent with the prior quarter, internal product was diverted to meet increased demand in the wholesale channel. We expect this to return to the 65% range over the course of the year as we strategically ramp cultivation capacity and expect to see further overall improvement in yields across our facilities as a result of process improvements in pre- and post-harvest. The benefit of economies of scale is not yet reflected in our cost of goods sold for the Ohio and Massachusetts facilities, which are still ramping. The cultivation utilization rate in Ohio and Massachusetts at the end of prior year was just 15% and 44%, respectively. By the end of Q1, those same rates increased to 27% and 58%, respectively, which we expect will have a future benefit to margins. By Q3 of this year, we expect those utilization rates in Ohio and Massachusetts to further increase to approximately 50% and 75%, respectively, with the ability to flex into additional canopy based on market demand. These improved utilization rates are expected to not only drive sales growth, but further benefit our cost structure as we seek to drive leverage across our fixed cost base. Lost from operations was $1.9 million, which represents an improvement of $7.6 million and $19.8 million compared to the prior quarter and the prior year, respectively. Total SG&A costs represents a decrease of just under $1 million and $12.8 million compared to the prior quarter and the prior year, respectively. SG&A as a percentage of sales was 33% during the quarter, down from 35% and 44% in the prior quarter and the prior year, respectively. Approximately 300 basis points of the year-over-year improvement is through the reclassification of expenses from SG&A to COGS in Q3-23, with the balance driven by cost-saving initiatives and further steps to streamline operations. Q1 adjusted EBITDA of $29.1 million represents a slight decrease of less than $1 million quarter-over-quarter and an increase of $8 million year-over-year. Adjusted EBITDA as a percentage of sales during the quarter was 24.6%, which was in line with the guidance of approximately 25% margins, which was just below the prior quarter of 26%, and 220 basis points above the prior year of 22.4%. In addition to maintaining our adjusted EBITDA margin in the 25% range, there have been noticeable improvements in add-back costs, which are excluded from this measure, including startup costs, acquisition and transaction costs, as well as other expenses. The sum of these costs, as reconciled in the adjusted EBITDA statement, decreased 32% from the prior quarter and 45% from the quarterly average in 2023, which represents a reduction of $3.8 million. And we expect this trend will continue resulting in a meaningful improvement year over year. Moving to the balance sheet, we ended the quarter with a cash balance of $71.2 million, representing a $20.4 million increase from the prior quarter, primarily driven by $40 million of incremental gross proceeds from the closing of our debt extension on February 7th. The senior notes are presented on the balance sheet net of debt issuance costs, which includes the fair value of the antedilutive warrants issued to shareholders, and is outlined in footnote 10 of our financials, which also covers the P&L impact in the quarter associated with the debt extension, with the loss on debt extinguishment being inclusive of the fair value of shares issued to senior note holders, as well as any non-cash fair value adjustments realized upon recognizing the new senior notes on our books. The cash flow from financing activities also included $8.4 million from the closing of our Gainesville mortgage upsizing on March 26. The total inflow from financing activities was offset by a $19 million reduction to current liabilities from scheduled payments of financing outflows as well as $9 million of debt issuance costs paid out upon closing of the February 7th debt extension. $8.7 million was generated in the quarter from operating cash flow, which was partially offset by $6.8 million of CapEx payments. resulting in positive free cash flow during the quarter. As David mentioned, we continue to expect approximately $20 million of total capex for the year, and we anticipate generating positive operating cash flow for the full year on both the 280E and non-280E tax basis and positive free cash flow given our previously discussed stance on 280E. We note that any contributions from the following three buckets are not included in our cash assumptions and would be considered incremental. One, the conversion of our outstanding warrants issued in February, totaling up to $50 million of net proceeds. Two, the receipt of an anticipated ERC tax credit, totaling $12 million of gross proceeds. And three, the receipt of a potential tax refund from our previously amended returns, totaling approximately $50 million of gross proceeds. As referenced in the annual earnings column, Q1, we updated our tax position to reflect the non-expectability of 280E. At the end of March, we filed amended tax returns for the years 2020 through 2022, resulting in a refund claim of approximately $50 million, which is currently outstanding. As previously mentioned, due to the uncertain nature of the tax position, this is not reflected as a receivable on the balance sheet. However, this is the first quarter where the impact of our tax position is reflected in the liability section of our financial statements, with the majority of the tax liability moving to an uncertain tax position within non-current liabilities and just $13.4 million remaining within current tax liabilities. which reflects our tax liability absent the application of 280E. As a result, our working capital position is now a positive $99 million. It's also worth noting that prior to the shift of taxes to non-current liabilities, working capital would still be a positive at $11 million, which would represent an improvement of $18 million from the prior quarter. In closing, we're pleased with our Q1 results, which was in line with our guidance. And with our balance sheet actions behind us, we are poised for the immense opportunities ahead starting with the near-term catalyst, the high adult use. With that, I will turn the call back to David.