Ayr Wellness Inc

Good morning, everyone, and welcome to the AIR Wellness fourth quarter and full year 2024 earnings call. Joining us today are AIR's interim CEO, Steve Cohen, the company's president, George DiNardo, and CFO, Brad Asher. Before we begin, we would like to remind you that 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 our most recent filed annual information forum and management discussion and analysis. Numerous risks and uncertainties could cause the actual 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 error's future results are beyond the ability of error to control or predict. In light of the uncertainties inherent in any forward-looking statements, you are cautioned against relying on these statements. While ERA may elect to update these forward-looking statements at some point in the future, ERA 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 would now like to turn the floor over to AIR's interim CEO, Stephen Cohen. Sir, you may begin.

Good morning, and thank you all for joining AIR's fourth quarter and full year 2024 earnings call. I'd like to start by thanking our team here at AIR. Since I became interim CEO, I've worked closely across the business, and I'm impressed with the talent, resilience, and determination of our team. Cannabis is a tough business, but our team is up to the challenge. Fiscal year 2024 and the fourth quarter in particular drove home what we all know. Challenges and volatility define this industry, including state and federal policy disappointments, macroeconomic factors that have further pressured the consumer wallet, rising labor costs, and challenging supply dynamics across a fractured state landscape. With that said, the team at AIR has faced these challenges with tenacity and dedication. On the other hand, it's clear that demand for cannabis continues to rise throughout the country, and our transaction volumes reflect that. The core thesis of cannabis as a consumer product remains stronger than ever. With that in mind, we have made crucial steps towards building a more resilient business with a focus on thriving in our current operating environment. We have taken major steps towards improving our leadership structure. We've elevated George Zanardo to president, and George is and will continue to take an increasing role in managing all day-to-day aspects of this business and effectively becoming my partner as interim CEO until I am replaced with somebody who will be the future of this business, along with George, Julie Winter, and Jamie Mandola, our chief revenue officers. We are aligning other members of our executive team to make our organization more sound and operationally focused, while all the time recognizing that that core of George, Julie, and Jamie is the group that will drive this business forward, and it is the team to which I believe we are all committed to supporting on the operational side of this business. While we still have a few key positions to fill, including CEO, I'm proud to say that our leadership team is motivated and better positioned to tackle the opportunity in front of us. Beyond the leadership team, we have taken key steps to further streamline our business eliminate headcount redundancies, and start the process of rationalizing our estate portfolio to be in the markets that make the most sense for our business. With these changes underway, we remain focused on controlling what we can control, executing with discipline, and positioning air for sustainable growth and profitability. Although I will address it at the end of the call, I also want to note that it is, with some degree, of sadness that this will be the last call that I will do with our CFO, Brad Asher. And I just want to, before I give final remarks about Brad, give him my personal thanks for his commitment, dedication, and support to this business. I'll now turn the call over to AIR's President, George DiNardo, to talk through high-level Q4 results and operational updates.

Thanks, Steve. I'm honored and excited to take on the role of President of AIR, and I appreciate the confidence placed in me to help drive the company forward. Our top priority is positioning AIR for sustainable growth and enhanced profitability within our existing footprint while ensuring long-term balance sheet stability. To achieve this, one of my immediate objectives is to create greater synergy and collaboration between our revenue-generating and supply chain functions. ensuring we maximize efficiency and optimize our operations. Turning to the quarter, in Q4, revenue was in line with our guidance and essentially flat compared to Q3. However, continued price compression and inventory challenges in Florida stemming from the transition to the new state-mandated Seed-to-Sale Tracking System impacted our top line and margin performance. Outside of Florida, revenue was supported by strong wholesale sales retail share gains in Pennsylvania and a full quarter of adult use sales in Ohio. Notably, our brands and store concepts continue to resonate with consumers in Ohio, resulting in market share gains despite the market becoming increasingly competitive with new dispensaries opening. Below the top line, margin performance was challenged by several factors. Post-sale price compression, which was further compounded by a higher percentage of bulk product sales, particularly in Massachusetts and Nevada, where we sold down aged inventory. Florida's seed-to-sale transition added excess operating costs and limited our inventory in our highest-margin state, and cultivation challenges in Pennsylvania that stem from facility upgrades during the quarter. However, these upgrades have already begun to drive improved production yields in our Q1 harvests. As we move through 2025, we anticipate continued competitive pressures across our markets, particularly in Nevada, Massachusetts, and New Jersey, as new retail stores come online. In Florida, pricing pressures remains an ongoing challenge, and we expect to navigate similar headwinds in our wholesale segment across other markets. We are proactively positioning air to offset these pressures through operational efficiency cost discipline, and a sharpened focus on our core markets. Our vision for 2025 focuses on two primary tracks, both of which build on top of the foundation that we've put in place throughout 2024. Those tracks include, one, investment in our core brands, and two, the streamlining of our operations to achieve cost efficiencies and enable quicker and better decision making. On the investment in our brands, we made strong progress last year in rationalizing our brand portfolio and relaunching each brand with higher quality biomass input, new modernized hardware, and new formulations to deliver the desired effects that our customers are looking for. As these elements have come together to deliver a much better quality experience, the response from our customers has been telling. Our CPG wholesale revenue in 2024 was up 20% year over year, with our core brands of Kind, Haze, and Later Days up 126% over prior year. And now we build on that. Across our footprint, we are rolling out comprehensive brand toolkits that incorporate physical presence at retail, bud tender engagement, digital e-commerce penetration, and digital content creation, and putting that in the hands of a revamped wholesale team now further incentivized to prioritize the sale of finished goods. With regards to streamlining our operations, we made progress in 2024 identifying inefficiencies and are now acting to clean them up. As we continue to streamline our operations and strengthen our financial position, we're taking a close look at our footprint to ensure we're focused on markets with the greatest potential for growth and profitability while maximizing our ability to make faster and more precise decisions. That means investing in the markets that we believe in and where we have a pathway to succeed and to move on from the ones that don't make sense from where we are as a business. To that end, we have signed a letter of intent to sell our assets in Illinois, a market where we do not have the necessary scale to compete over the long term and where we lack vertical integration and our CPG brands to complement our four retail stores. We're taking a hard look at other markets to make sure we are prioritizing those core markets that will deliver for our business. Within our core markets, we are making a concerted effort to consolidate our facilities, which we began last year with the closure of our Ponderosa manufacturing facility in Nevada and the sublease of our original medical cultivation and manufacturing facility in Massachusetts. We will be further streamlining our Nevada operations with the closure of our secondary cultivation site later this month and consolidating cultivation in a single turnkey facility with cultivation, manufacturing, and distribution capabilities, which will reduce operating costs without impacting top line. From a company-wide standpoint, we are laser-focused on right-sizing our SG&A. We have already made substantial cuts related to regional consolidation and corporate overhead, and we anticipate providing further updates on our SG&A reduction efforts throughout the year. We remain confident that sustained growth and enhanced profitability are achievable within our existing footprint, but we recognize that execution will be critical. As we advance initiatives across our core markets, we do so with a keen focus on balance sheet discipline and ensuring the long-term health and success of the company. Now to hit a few key updates across our markets. Despite the setback of Amendment 3 in November and the challenging conditions faced in Q4, we believe Florida presents significant opportunities for organic growth as a medical market. Considering the ongoing price compression, executing on our strategic cultivation expansion is now more important than ever. With that in mind, a key initiative for this year is the launch of our new indoor cultivation facility in Ocala. which is expected to come online in Q2 and begin contributing to results at the end of Q3. This facility is one of our most important catalysts of the year, as our lack of high-quality indoor flower has been a persistent drag on performance in the state and has not allowed our aforementioned brand portfolio to thrive in the way we like to see. As a reminder, our Florida retail stores represent approximately 70% of our total retail network. Once fully operational, Ocala will more than double our current flower production capacity, enhancing product assortment in premium flower and concentrates, which represent historically underperforming product segments for air, and significant growth and margin opportunity, even under the current medical-only framework. This facility will complement our existing Gainesville facility, directly addressing our current deficit in premium flower production, which is a highly sought-after category by customers. Beyond Florida, we are focused on scaling our business in Ohio, where adult use sales in Q4 contributed to meaningful increases in both retail and wholesale revenues. While the state's adult use launch has been somewhat tempered by regulatory restrictions, including limitations on marketing and advertising, as well as certain product types like pre-rolls, we expect a further ramp in sales as additional form factors are approved. In February, we opened our fourth adult use store and remain on track for further expansion with our fifth location opening later this month and an additional two stores by year end. As new retail locations open across Ohio, we will continue to assess the market opportunity and scale production at our 58,000 square foot farmer cultivation facility and Akron production facility as appropriate to both support our own stores and drive greater wholesale penetration. In Pennsylvania, we continue to closely track legislative progress, and we will be ready to scale should adult use legalization advance. In the meantime, we are focused on driving operational efficiencies across cultivation and production, rebounding from Q4's production decline, and benefiting from the installation of new equipment. As mentioned, in Q4, we took a margin hit on Massachusetts wholesale contributions through an initiative to sell through aged and excess inventory. With our improved inventory levels, we have shifted our focus towards selling more finished goods supported by our brand portfolio and an updated wholesale commission system. We are confident that this sales strategy will drive more consistent and profitable results beginning in the current quarter. Even setting aside the inventory reduction during Q4, AIR's three core brands, Kine, Hayes, and Later Days, continue to gain market share in Massachusetts wholesale, due in large part through deeper penetration and sell-through with existing doors for our narrow brand portfolio. While we have not seen a rebound in pricing levels as some large operators have exited the market, pricing appears to have stabilized. We continue to believe that our Massachusetts CPG business will maintain its strong position in the market over the long term. Last fall, we announced the receipt of a conditional license for exclusive rights to operate vertically integrated operations in Virginia. a significant long-term opportunity. We are excited to establish operations in Virginia's medical market while remaining well-positioned for any potential movement on a dual-use legalization. Before I wrap, I want to reaffirm our commitment to executing with discipline and sharpening our focus on the core markets where we operate, Florida, Nevada, New Jersey, Pennsylvania, Ohio, and Massachusetts. We recognize that the near-term environment remains dynamic and challenging, but we are leaning into our strengths with a clear strategy to drive sustainable growth and enhance profitability over the long term. We'll now turn the call to our Chief Financial Officer, Brad Asher, to walk us through financial results.