The Cannabist Co Hldg

Good day, and thank you for standing by. Welcome to the Columbia Care second quarter call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 11 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Senior Vice President of Capital Markets. Please go ahead.

Thank you, Operator. Good morning, and thank you for joining ColumbiaCare's second quarter 2022 earnings conference call. With me today are Nicholas Vita, our Chief Executive Officer, David Hart, our Chief Operating Officer, Derek Watson, our Chief Financial Officer, and Jesse Shannon, our Chief Growth Officer. Earlier this morning, we issued a press release reporting our second quarter 2022 results, which we also filed with the applicable Canadian Securities Regulatory Authorities on CDAR and the U.S. Securities and Exchange Commission on EDGAR. A copy of this release is available on the Investors section of our corporate website, where you will also be able to access a replay of this call for up to 30 days. Please note that the remarks we make today regarding future expectations, plans, and prospects for the company, including statements relating to the Cresco Labs transaction, constitute forward-looking statements within the meaning of applicable Canadian and U.S. securities laws. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, which we disclose in more detail in the Risk Factors section of our annual Form 10-K, dated March 31, 2022, as filed with applicable regulatory authorities and in subsequent securities filings. We remind you that any forward-looking statements represent our views as of today and should not be relied upon as representing our views as of any subsequent date. While we may update any such forward-looking statements in the future, we specifically disclaim any obligation to do so except as otherwise required by applicable law. Also, please note that on today's call, we will refer to certain non-GAAP financial measures such as adjusted EBITDA. These measures do not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies. Columbia Care considers certain non-GAAP measures to be meaningful indicators of the performance of its business in addition to, but not as a substitute for, our GAAP results. A reconciliation of such non-GAAP financial measures to their nearest comparable GAAP measure is included in our press release issued earlier today. With that, I will turn the call over to Nicholas Vita to get us started. Nick?

Thank you, Leigh. Good morning, everyone, and thank you for joining our call. This quarter was an unprecedented moment in the time for the markets and the company. We heard from our consumers that inflation is back-breaking, wallets are empty, crime is up, qualified labor is scarce, and overall confidence and happiness is down. Our answer to these cyclical challenges has been to first look within our organization to find opportunities and make decisions that enhance our position and make us stronger when the environment normalizes. We are proud of the steps we continue to take to move the ColumbiaCare towards a better, more efficient baseline. These economic trends have only reaffirmed our decision to combine with CRESCO. Having observed firsthand how the integration planning is going, I feel better than ever that the scale and power of this combination will profoundly change the cannabis market and create the unquestionable leader in the industry. As momentum builds among our companies, so too has the excitement throughout our organizations, among our investors, and within the communities we serve. In that context, with the pending dispositions and regulatory approvals upon us, this will likely be the last quarter the last quarterly earnings call where ColumbiaCare will report as the business and portfolio in the same way. Turning four operations, in spite of the economic headwinds and challenges, which disproportionately impacted our mature markets, we saw surprising resilience across the country, and in several cases, outstanding performance in our highest growth emerging markets. Cannabis is counter-cyclical in many respects, but what makes the sector truly unique is that the legalized markets such as New Jersey, Virginia, and West Virginia have embedded organic growth that is extraordinary in today's environment. At ColumbiaCare, we've continued to make decisions to drive the organization forward first by capitalizing upon growth from emerging markets as they transition to more favorable regulatory structures. Second, further leveraging our constantly expanding scale of that we have invested in over the past several years, and third, implementing strategies in mature markets like Colorado to consolidate supply and distribution channels. It is important to note that this process will happen in every highly fragmented market as the sector evolves. As market leaders, we prefer to participate in the acceleration of this process in spite of short-term dislocation to ultimately achieve a rational marketplace with long-term growth and stable margins. The market shift that has occurred in Colorado over the past two quarters is the most visible example of the invisible hand of supply-demand dynamics forcing a return to normalcy, a process that is required to ensure growth and profitability for the surviving operators in 2023. With this context, let's discuss the Cresco transaction. We've made significant progress towards closing the transaction since the March announcement. First, we cleared federal Hart-Scott-Rodino antitrust review, the only federal hurdle in the U.S. Second, we received overwhelming approval from our shareholders with over 98% of the votes cast in favor of the transaction. Third, we received approval from the Supreme Court of British Columbia, the last judicial approval needed in Canada. Fourth, the asset divestiture process has been progressing as planned in terms of timeline and expectations for gross proceeds. And let me share some relevant details there to help you think through timing. In every market with planned divestitures, prospective bidders have completed initial due diligence, we have evaluated bidders, have signed LOIs in advance of executing definitive agreements for every asset being sold, awarded exclusivity to certain lead bidders, and are now moving through the final negotiations to sign definitive purchase and sale agreements, which we expect to announce in the next 30 to 45 days. The state regulatory approval process continues to move forward on a similar rapid path. We have already submitted license transfer applications for over half of the licenses that require approval. Applications for the divestiture markets are being prepared, and we plan to submit them concurrently with the execution of definitive agreements for the asset sales to advance an expedited and successful review process. And lastly, in terms of the integration and pre-closed work streams needed to plan for an efficient and effective combination, every targeted integration milestone is on track to accommodate the late 2022 close. From a cash flow and liquidity perspective, the upcoming asset sales will result in a substantial reduction in capex. This is expected to positively impact our free cash flow toward the end of 2022, as well as the free cash flow and net debt of the combined business. This is all very good news for shareholders, for our team, and for the industry. In the context of cyclical macroeconomic headwinds, a new bipartisan federal landscape in the next 12 to 24 months, ColumbiaCare, as part of CRESCO, will emerge as the most scaled best capitalized company in the industry. There's never been a moment in the history of regulated cannabis when it has been so clear that scale is the most important determinant for long-term success. Before I turn the call over to Derek, I would like to make a few comments regarding the company's performance in 2Q. Our performance this quarter was a tale of two cities. In spite of the difficult environment, we made decisions, some of which were quite difficult, to affect positive outcomes at the corporate level, and in particular in markets where structural change is required to stabilize the environment. The company delivered solid organic top-line growth of 5% sequentially to reach $130 million of revenue for the quarter. That's up 18% year-over-year top-line in an environment where the broader economy saw a second sequential quarterly decline. In 12 of our 17 U.S. markets, we achieved sequential growth in gross margin. In 10 markets, we saw sequential growth in EBITDA. 16 out of 17 markets were EBITDA positive this quarter. Unfortunately, the $6 million sequential decline in Colorado's EBITDA negatively impacted our consolidated adjusted EBITDA margin, which showed a decline of 9% for the quarter. Excluding Colorado and California, Columbia Care saw a 500 basis point improvement in adjusted EBITDA of over 14% in our other markets, 60% better than last quarter's consolidated results. As David Hart will discuss in more detail, we saw standout results in a number of markets, including New Jersey, which more than doubled revenue on a sequential basis, West Virginia, which more than tripled the revenue quarter over quarter, Virginia, which saw revenue increase more than 12% over Q1, and Florida, where we saw a 200 basis point sequential improvement in gross margin. Along those lines, we have achieved continued growth of our in-house brands, which now represent approximately half of our retail value. This supports a better customer experience, helps drive foot traffic, and protects margins. This is particularly important as the consumer is unquestionably under pressure, and we see a continued shift in preference to the value segment, reflected in pricing of the average basket size that has declined in most markets. Wholesale has also come under significant pressure. This was particularly impactful in Colorado, where in spite of having a cost per gram of packaged trim flour of less than $1.35 most recently, Pricing continued to fall below those levels at times in concert with competitor closures, company closures, and the company inventory liquidation. This has led to disruption at all levels with larger players exiting the market and smaller players folding throughout the supply chain. I believe it is in our best interest as the largest operator in Colorado to advance the normalization of the market. We are making decisions now with that mindset in order to benefit in the long term from our leadership position in the second largest regulated cannabis market in the world. Sequential underperformance in Colorado and California had a disproportionate impact on our quarter results for the quarter. As I mentioned before, excluding those two markets, our EBITDA margin would have been over 500 basis points higher for the quarter and 60 basis points better than last quarter. David Hart will discuss the proactive steps we took into Q to remediate the Colorado market and also to discuss what we are doing in those markets today to reverse the trajectory that we saw in Q2 and to bring those markets in line with what we are seeing elsewhere in the portfolio. We've made tactical investments in our infrastructure and cultivation operations that have significantly lowered the production costs for both harvested flour and packaged products in these markets and expect these changes to deliver improved results in 2H22 accelerating into 2023. Across the board, we have implemented significant cost reduction programs and are judiciously managing capital spending with a focus on specific dispensary and production projects. ColumbiaCare remains well-positioned in some of the strongest growth markets in the industry, including New York, Virginia, West Virginia, and we are pleased to see cultivation yields and quality that continue to improve and lower our cost per gram. In addition, our internal brand portfolio serves as the customer's experience differentiator and continues to attract and retain customers in the segments being targeted. Although we are not counting on near-term improvements in Colorado and California for financial planning purposes, we have seen some strength return to both markets in July and are comfortable that in the context of our cost-cutting activities and significant improvements in cultivation efficiency, we can deliver better products at lower costs with higher margin going forward. Any snapback in either market would have a materially positive impact on our overall performance. In the meantime, we continue to execute against our strategic growth initiatives and remain excited about the combination with Cresco to create market-leading scale that will drive greater efficiencies and bring value to our customers and shareholders alike, especially at our high-growth, high-margin markets. Now, let me turn the call over to Derek to review the quarterly results and our outlook for the second half of the year in more detail.