Ayr Wellness Inc

Welcome to the AIR Wellness Third Quarter 2024 Earnings Call. Joining us today are AIR's interim CEO, Stephen Cohen, and company's CFO, Brad Asher. Before we begin, we would like to remind everyone that certain statements from management during this presentation may contain forward-looking information for purposes of applicable securities laws and are based on management's current 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, estimate, or definitive statement of fact or probability. Many of these risk and uncertainties are discussed in our most recent public filings, including our most recently filed annual information form and management's discussion and analysis, both of which are available to be viewed through the company's profile on CEDA Plus or EDGAR. 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. Numerous factors that will determine error's future results are beyond error's control and cannot be predicted at this point with any accuracy or at all. 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 forward-looking statements at some point in the future, AIR specifically disclaims any obligation to do so except as required by law. During this presentation, we may reference non-GAAP financial measures, such as adjusted EBITDA, adjusted gross profit, and adjusted gross margin. 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, as well as on CEDA+. With that, I will now hand the call to Interim CEO, Stephen Cohen.

Good morning, everyone, and thank you for joining AIR's third quarter 2024 earnings call. I'd like to start today's call by thanking the entire team at AIR for their assistance and support as I stepped into the role of Interim CEO. In the cannabis industry, every quarter is challenging, but we are committed to AIR developing sustained growth and profitability over the This will only be accomplished through improved execution and capitalizing on the company's presence in the best markets. We're disappointed with last week's results on the Florida Amendment 3 initiative. Despite not achieving the desired outcome, we extend our thanks to the 56% or so of Florida voters who turned out to vote yes on three and also thank our partners in the Smart and Safe Coalition. I do want to stress that Florida remains one of the largest cannabis markets in the world, with projected sales of roughly $2.7 billion this year, according to BDSA, and is deeply committed to our medical business in the state. There is significant opportunity for organic growth in our Florida business over time, particularly as we bring online 100,000 square feet indoor cultivation facility in Ocala. Our Ocala facility complements our existing cultivation and production facility in Gainesville and addresses one of AIR's biggest deficits in the state, a lack of premium flour. We have historically underperformed on market share in flour, and our expectation is that the new facility will change that. The Ocala facility will more than double our current flower production capacity, which supports future store openings and more robust menu offerings that, in turn, open us up to new types of customers, even within the current medical market. The facility and ongoing build-out is fully financed through a sale-leaseback transaction with innovative industrial properties. We anticipate contributions from the facility beginning next summer in 2025. Beyond Florida, we're focused on scaling our business in Ohio, where AIR was among the first operators to launch adult use sales in August via our three existing stores and wholesale business. The launch of adult use sales in Ohio resulted in an increase in both retail and wholesale revenues in the state during the third quarter, even as the overall launch for the state was somewhat muted by temporary regulatory impediments that prohibit certain types of products, such as pre-rolls, as well as marketing and advertising. We expect a further ramp-up in statewide sales once additional form factors are approved. In the coming months, we plan for further expansion in Ohio as we target operating eight air branded stores open in the first half of 2025, leveraging additional licenses awarded as part of the adult use rollout. As additional stores open throughout the state of Ohio in 2025, we intend to further scale production levels at our 58,000 square foot Parma facility for cultivation and our Akron production facility to support our stores and wholesale operations. In Pennsylvania, we continue to be optimistic about the prospects for adult legalization in 2025. Both retail and wholesale performance in the state's medical market have been challenged in recent quarters due to the increased competition pricing dynamics. However, the state remains one of the largest markets yet to convert to adult use and presents a meaningful growth opportunity for us in the future. AIR maintains a robust, vertically integrated operation in Pennsylvania with nine retail stores, two cultivation sites that are all primed to convert to adult use once legislation passes without the need for meaningful CapEx investment. Meanwhile, in September, we announced receipt of a conditional license for exclusive rights to open vertically integrated operation in Virginia's health service area one region. The region is one of five in the state and includes Charlottesville, Fredericksburg, Spotsylvania, and Stafford, representing a serviceable population of roughly one and a half million people. We're excited to operate in Virginia's medical market while closely monitoring any movement on adult use opportunities in the future. To date, we have identified sites for the dual-purpose cultivation and retail facility and five satellite retail locations. And we're working through the regulatory process to build out our presence in the state. Just yesterday, we received notification that New York State was awarding our New York Partnership a registered organization license to operate in the medical market. That's good news for air and for the future of our business. that should develop as the New York marketplace begins to expand and grow. Pivoting to our Q3 results, overall revenues declined 2.5% sequentially compared to Q2 results and were flat year over year. Despite lower revenue, we grew adjusted EBITDA in the quarter and adjusted margin improved to 100 basis points sequentially to 22.9%. The Q3 revenue decline reflected ongoing macroeconomic pressure on the consumer wallet as well as increased competition in a few of our key markets, particularly in New Jersey and Pennsylvania. These pressures offset growth from the launch of adult use sales in Ohio, wholesale expansion in Massachusetts, and the opening of new retail stores in Florida, Illinois, and Connecticut. While some retail weakness in New Jersey persisted due to increased competition, The larger drag on the quarter came in wholesale, with pricing and sales affected by new cultivation and production capacity coming online throughout the state. In New Jersey, there have been more than 40 cultivation licenses approved in the past two quarters, and the number of operational product manufacturers in the state wholesale market is up four times since last quarter, leading to a more crowded and increasingly competitive wholesale market. We're confident that we can return to our target of 25% EBITDA margins over time through continued operational enhancements, product development, and as growth catalysts come to fruition, which include further ramp up in Ohio, contribution for the new Florida indoor cultivation, and the prospect of adult use conversion in Pennsylvania. We'll pursue additional cost reductions where possible as reflected by our facility and corporate consolidation in QC3, which will provide roughly $16 million in annual cost savings moving forward. These cost savings are keyed to achieving greater efficiency without compromising performance. As we enter the fourth quarter, we anticipate a continuation of consumer wallet pressure driving value-based decision-making and competitive pressures, and thus we expect revenue and adjusted EBITDA to be in line with the third quarter. Notably, we remain on track to generate positive cash from operations for the full year 2024. Finally, I'd like to touch upon recent management changes. In September, we announced the departure of David Goubert, our previous president and CEO, and we wish him well in his future endeavors. AIR's Board of Directors has appointed me to the role of CEO. I appreciate the vote of confidence placed in me by the Board of Directors. I view my role as to ensure continuity of operations as the Board identifies AIR's new permanent CEO. We've commenced a search, and the company will provide further updates when appropriate. In the meantime, AIR cannot be flat-footed. As we all know, cannabis is a dynamic and challenging marketplace. I am mindful that AIR must be responsive to the various markets in which we operate and to the opportunities as they arise. I believe that one of my most important roles during my tenure will be to ensure that an excellent leadership team is in place and has the support to be successful. To that end, there have been changes made to the senior leadership structure transitioning all revenue responsibilities into our two chief revenue officers, Jamie Mandola and Julie Winter, in conjunction with Chief Operating Officer George DiNardo. George's role as COO was expanded to provide greater oversight of marketing and greater coordination with our co-chief revenue officers. We have also given our chief technology officer, Sarvesh Mathur, supervision over digital aspects of our marketing efforts, In all, these steps are designed to align responsibility and accountability. We are confident that the new approach will enhance our effectiveness and create a more nimble organization. With that, I'll now turn it over to Brad Asher, Chief Financial Officer, to walk through the financial results before returning for closing remarks.

Brad? Thanks, Steve, and good morning. Q3 sales of $114.3 million represents a decrease of 2.5% from prior quarter and flat to prior year, coming in below our guidance, which called for modest growth, due to price compression and macro headwinds across our key markets and a slower-than-expected ramp in the Ohio adult use launch. The price compression was pervasive this quarter, with BDSA reporting decreases across many of our markets, including approximately 15% price compression in Florida quarter over quarter. While overall retail transactions continue to increase, with a 1% increase this quarter, marking our third sequential quarter of transaction growth, overall retail sales declined 1.5% quarter over quarter, driven by a 2.5% decline in average basket size. Ohio retail has increased approximately 130%, resulting in an increased market share, with the overall market increasing closer to 100% since the adult use launch on August 6th. However, there were also lower than expected increases from the contribution of new stores during the quarter, including two in Illinois and our first store in Connecticut, which are still in customer acquisition mode, and we expect these to continue ramping through the fourth quarter and early 2025. Retail gains from these markets were fully offset by the impact of price compression and further competition across the remaining key markets. On the wholesale front, the sequential decline of 1.5 million was driven by an overall decline in MSO customer accounts across key markets as the trend of increasing their own share of retail shelf space continues. In addition, New Jersey wholesale took a step back as the overall number of cultivation and manufacturing operations in the state jumped, increasing the state brand market share of non-MSOs from 18 percent in March to 31 percent in September, according to our calculations from BDSA market data. And lastly, while Ohio wholesale increased sequentially upon the launch of adult use, the contribution came in below expectations, which will take longer to ramp as the new adult use retail licenses begin to open over the next few quarters. Q3 gross profit of $43 million represents a decrease of 9% and 11% compared to prior quarter and prior year, respectively. Q3 adjusted gross margin, a non-GAAP measure of 52.8%, represents a slight increase of approximately 100 basis points compared to the prior quarter as a result of Ohio adult use launch and increased utilization of the cultivation facility. and slightly higher retail internalization of 64.6% compared to 63.4% in prior quarter, and 190 basis points improvement when excluding Florida, as well as cost-saving initiatives. With regards to cost savings, we remain committed to driving efficiency and are fully focused on generating cash flow. During Q3, we identified additional opportunities to consolidate operations which allowed us to sunset a standalone manufacturing space in Nevada, as well as enter a sublease of our legacy Massachusetts cultivation space to a third party. While this resulted in $2.2 million of non-cash impairment realized during the quarter, streamlining these operations will contribute to immediate cash savings. And following the Florida vote, we are doubling down and accelerating further streamlining and cost-cutting initiatives. Loss from continuing operations of $17.4 million represents an increased loss of approximately $9.8 million and $16 million compared to the prior quarter and the prior year, respectively. In addition to the $2.2 million impairment discussed previously, there was $7 million of severance expense during the quarter, which contributed to the increased loss. Approximately 90 percent of the severance expense relates to non-cash stock-based compensation. Overall annualized salaries decreased by approximately $5 million when compared to the start of Q3 to the start of Q4, inclusive of the actions to three-mine operations as well as reduction in corporate headcount. These savings occurred during the course of the last several months and therefore will see more of an impact in Q4 than Q3. Adjusted EBITDA add-backs increased during the quarter, driven by the transition to sunset certain cultivation and manufacturing facilities as well as non-cash inventory write-downs and severance costs. However, it is worth noting that adjusted EBITDA add-backs comprising acquisition and transaction costs, startup costs, and other is still 15% below the prior year year-to-date amount. Q3 adjusted EBITDA, a non-GAAP measure of 26.1 million is in line with prior quarter and approximately 2.3 million below prior year. Adjusted EBITDA as a percentage of sales during the quarter of 22.9% was 100 basis points above the prior quarter of 21.9% and 200 basis points below the prior year of 24.9%. While this was in line with our Q3 guidance of improved adjusted EBITDA margins, we now anticipate margins to be roughly flat through the fourth quarter. Moving to the balance sheet at the end of the quarter with a cash balance of 50.6 million representing a 3.1 million increase from the prior quarter. primarily driven by positive cash flow from operations during the quarter of $16.3 million and free cash flow of $10.2 million. The sequential increase in cash is inclusive of the $2.9 million of principal debt payments during the quarter, leaving approximately $4 million of principal debt payments in the fourth quarter and approximately $19.6 million over the next 12 months. Year to date, we maintain positive cash flow from continuing operations of $19 million and we continue to expect positive cash flow from operations for the full year. Year-to-date, CapEx of $16.5 million is on track with the annual estimate of approximately $20 million. Looking ahead to next year, we anticipate CapEx to be at least 25% to 50% less and will provide a full-year target during the fourth quarter earnings call. In conclusion, this was a challenging quarter that fell below our expectations. However, we continue to tighten the belt on the expense side and remain focused on driving further efficiencies in the business. With that, I'll turn the call back to Steve.