Jushi Hldgs Inc Cl B

Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Jushi Holdings, Inc. Second Quarter 2023 Earnings Conference Call. Today's call is being recorded. I will now turn the call over to Lisa Foreman, Director of Investor Relations.

Thank you. Please go ahead. Good morning, and thank you for joining us today on Jushi's Second Quarter 2023 Conference Call. My name is Lisa Foreman, and I am Director of Investor Relations at Jushi Holdings, Inc. With me on today's call are Jim Cacioppo, our Chairman and Chief Executive Officer, and Michelle Mosier, our Chief Financial Officer. This call is also being broadcast live over the web and can be accessed from the Investor Relations section of the company's website at ir.jushico.com. In addition to the company's GAAP results, management will also provide supplementary results on a non-GAAP basis. These refer to the press release issued today for a detailed reconciliation of GAAP and non-GAAP results, which can be accessed from the investor relations section of the company's website at ir.jushikoperiod.com. Additionally, we would like to remind you that during this conference call, we will make forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance, and business. Although Jushi believes our estimates and assumptions to be reasonable, they are subject to a number of risks and uncertainties beyond our control and may prove to be inaccurate. We caution you that actual results may differ materially from any future performance suggested in the company's forward-looking statement. We refer you to the company's current and periodic reports filed with the SEC and on SADAR, including our most recent annual report on Form 10-K for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statement. Jushi expressly disclaims any obligation to update this forward-looking information. I will now turn the call over to Jim.

Thank you, Lisa, and thank you, everyone, for joining our call today. This morning, I will provide an overview of our second quarter 2023 performance and operational achievements. I will then turn the call over to Michelle to review our financial results in more detail before opening the question-and-answer period. First, I'll begin with a summary of our top-line results. Revenue for the second quarter of 2023 was approximately $66 million. The reduction in total revenue, approximately 9% year-over-year and 5% sequentially, was primarily due to lower retail sales as a result of the closure of three art-performing stores, exit of lower-margin wholesale business, and market compression and competition in Illinois, Nevada, and Pennsylvania, which Michelle will expand on later. Specifically, Illinois sales declined approximately 20% sequentially and approximately 40% year-over-year. The Illinois sales decline was primarily attributable to adult use in Missouri. This was offset by new dispensary openings in Virginia and our newest vertical market in Ohio. Our wholesale revenue continues to expand, growing over $1 million year-over-year. This was driven by various operational enhancements made over the last year, which have significantly increased efficiencies and production levels at our grower processor facilities in Massachusetts and Virginia. On that note, Jushi-branded product sell-through grew to approximately 47% of total retail sales across our five vertical markets, in comparison to 32% in the second quarter of 2022. We again attribute this progression to improved product quality and increased activity at our optimized grow processor operation. As communicated widely across the industry, revenue will continue to fluctuate as macroeconomic challenges persist. We expect to offset the impact of this with several upcoming catalysts in our core market. This includes the opening of our Woodbridge, Virginia dispensary, the launch of competitive higher margin products and pending regulatory changes in Pennsylvania, which I will speak more about later in the call. Q2 growth profit increased by approximately 15% year-over-year to $31 million. Our growth margin grew to approximately 46% compared to 37% of revenue year-over-year. Although we experienced tremendous margin growth in the second quarter, we hope to maintain these margins and continue to grow them over time with sustained cost controls, company-wide optimization efforts, increased sell-through of our branded products, and launching new higher margin products as well as other efforts. In the second quarter, operating expenses were reduced by approximately 30% year over year from $39 million in the second quarter of 2022 to $27 million in the second quarter of 2023. Most notably, in the second quarter of 2023, adjusted EBITDA was $13 million, an increase of approximately $12 million year over year and approximately $5 million sequentially. Additionally, we achieved an adjusted EBITDA margin of 19%, surpassing our internal target of 15%. For the remainder of the year, one of our key focuses remains on growing our gross margin by continuing to streamline labor through process efficiencies, improving production yield, product potencies, and quality, as well as reducing other related production costs, such as packaging materials. With new store openings, more focus on consumer and store traffic, and better pricing information, including localized pricing, we expect to increase foot traffic and retail revenues. I'll now provide a brief update on our cost savings and efficiency optimization efforts across our footprint. At Agro Processors, we have achieved the desired production to meet current demand and have the flexibility to expand our current scale as needed. Our costs continue to go down. Additionally, our plant yields and potency levels continue to improve across our footprint as operational upgrades are expected to continue into the second half of the year and are expected to help grow revenues and increase profitability. At the beginning of the year, we switched over to a more sustainable, cost-effective mylar-based packaging across our major brands, which is expected to reduce Shushi's carbon footprint. This has resulted in cost savings of approximately $1 million in the second quarter of 2023, with an expected future run rate of savings of at least $1 million per quarter. Additionally, we expect larger savings to be realized as the new packaging continues to be embedded throughout our products. Next, our optimized retail hour labor model continues to take hold and has driven significant savings. After just one quarter, we achieved over a 50% reduction of retail labor hours relative to last year's peak following the implementation of the model in Q2 of 2023. Our overall headcount has been reduced from approximately 1,570 employees at our peak in 2022 to approximately 1,160 employees as of June 30, 2023. We have made significant progress in reducing our operating costs by approximately 30% year-over-year, with a notable reduction of labor and employee-related expenses, including a reduction in share-based compensation as a result of our lower stock price. Our streamlining of labor is nearly complete, although some of the cuts will flow through in the third quarter. Any further reductions are expected to be through attrition as opposed to reductions in force. With rigorous cost controls and robust operational discipline, we believe we are positioned to achieve our goal of generating positive operating cash flow within the next few quarters. Moving ahead, I will walk through our operational achievements across our core market footprint for the second quarter of 2023 and going forward. Beginning with Virginia, we are gearing up to open our sixth medical dispensary in the state in Woodbridge before the end of the month. Virginia continues to lead the increase in our online reservation orders on our Beyond Hello e-commerce platform as patients in the state have shown their preference for convenient pickup and delivery services. We continue to see an increase in the total number of unique patient visits within JUCHI's exclusive retail service area. As of July 21st, we had approximately 27,240 total number of unique patient visits at the Yacht Hello dispensaries in our Virginia footprint. As for sales being impacted by Maryland going adult use, we are not seeing a similar impact as we did in Missouri affecting Illinois sales. Our main competitor continues to be the illicit market where products are not regulated or tested for consumer safety. Our grow processor operations in Virginia continue to improve but are still below our desired production goals. Through bringing on more grow rooms under the existing warehouse and improving yields, we can significantly increase production capacity as the market grows. Bringing online additional available capacity will continue to be evaluated based on market demand. As the fall election approaches in Virginia, we are optimistic about the historic turnover of approximately 30% of Virginia State Senate members and approximately 40% of the Virginia House of Delegates retiring ahead of the November election. The November elections will mark a generational shift among legislators and will have the potential to reinvigorate discourse around the enactment of long-awaited policy changes in the state's cannabis market. We are launching an array of new products in the back half of the year. We meet our tiny expectations, which is always a challenge due to required regulatory approvals. We will launch 13 new products during the second half of the year. In a recent survey, our patients noted more product selection is what they want. We are well down the road of delivering these new SKUs, which should drive sales and margin growth in this nascent market. I will discuss some of our company-wide new product developments in a few minutes. Next, on to Pennsylvania. Two of our recently closed dispensaries are being relocated and are expected to become operational at new locations in 2024, one of which is under construction and should be open in Q1 of 2024. Our deep knowledge of the market has enabled us to identify prime locations to grow and optimize our Beyond Hello retail network. At our grower processor in Scranton, Pennsylvania, we have dramatically improved product yields, potency, and other quality metrics, but we are still running below our desired plant yields as we ramp up. Yield growth will allow us to grow our production with the market and take down some older, less efficient grow rooms. Eventually, we will renovate these rooms in a high ROI fashion when Pennsylvania adopts adult use legislation. We are incredibly encouraged by the positive momentum surrounding the bipartisan adult use bill under active consideration of Pennsylvania. The bill is very middle of the road and allows medical cannabis operators such as Juicy to add adult use operations to their existing operations. The bill's bipartisan co-sponsors are committed to seeking passage this year with public backing from Governor Shapiro and committee hearings are being targeted for the fall. There is tremendous support for Pennsylvania demonstrated by various grassroots campaigns and polling results showing that over 65% of residents support legalization. It is expected that the impact that the nascent New York and strong New Jersey adult use markets have had on Pennsylvania will be mitigated with the passage of this bill. And the current industry is well equipped, ready and eager to serve a new demographic of consumers in the Commonwealth. Moving to Massachusetts, progress continues to be made on our optimization program at the Lakeville facility, which underperformed in 2022 relative to expectations due to unexpected facility and process issues. As discussed on the last call, we have enhanced leadership and have implemented an aggressive set of performance goals to strengthen performance and satisfy safety standards across the facility. Our landlord is completing a significant upgrade to the building's mechanical this summer per a negotiated settlement. These building improvements should allow us to get closer to our operational performance target. On the cultivation side, we continue to make progress with increased yield and potency. There is a robust product innovation pipeline in the works, which has led Jushi's national innovation on new products. At Massachusetts, it's an easier market to introduce new products. Larger format dates and a few products have been a big hit with our customers as they get more value for each dollar spent, which they really appreciate in these tough economic times. With these new products, we can deliver better value to our customers while improving our margins. We still have various new products expected to be launched in the back half of the year, including additional thoughtless formats under the Lab brand, which were initially introduced to the market in July. Increased efficiencies and savings are expected to be realized in the coming quarters, including the significant impact from our new sustainable packaging I detailed earlier as it continues to be implemented in these operations. On the brand and product front, we are thrilled to be closer to debuting our anticipated premium Hijinx brand across several states in the second half of the year. Hijinx is a new line of products curated to meet the diverse needs of all types of cannabis consumers. Hijinks will both various strains of premium flour housed in unique packages designed by local artists and Jushi team members, meaning not one package's branding is designed like the other. The brand places an importance on each consumer's experience above all else by having limited and select genetics with unique qualifications, as well as high cannabinoid and terpene content that is harvested, processed, and handled by hand. Through an annual donation, Hijinx will support the building and restoration of water wells across the world as part of Jushi's existing partnership with Drop for Drop and an international organization with a mission to provide clean water to those in need. Hijinx will be our premium flower brand. The Restructured Bank will be our mid-tier flower brand. And our popular Sashay is our well-performing value flower brand that houses all of our new infused products. Another big launch is Sashay Kind Grinds. Our line of high-potency value-focused pre-ground infused flour and pre-roll recently launched in Q1 in Massachusetts. We're already seeing strong sales in our Massachusetts dispensaries. It is our number one selling product on our Massachusetts menus with above-average margins for juicy in that market. We look forward to launching these products in our Pennsylvania and Virginia stores. In the coming quarters, we are focused on expanding margins and increasing our market share with a strong lineup of new and competitive products. In addition to the launch of Hijinx and Sashay Kind Grind, we expect to roll out several new products from our core brands across our footprint. Specifically, we will be launching four new products in Massachusetts, which has led the company with three new products in Q2 of 2023. We expect to launch nine new products in Pennsylvania, and 13 new products in Virginia across our brands in the second half of the year. Many of these new products, like larger vape cartridges and infused products, offer better value to our customers and better margins to Juicy. Other products, like concentrates in Virginia, further enhance our in-house product menus, which should help drive a higher percent of Juicy-branded product sales. And in a nascent market like Virginia, we hope these new products drive customer traffic. Before concluding, I will provide an overview of the initiatives we have undertaken to strengthen our financial position and optimize our capital structure. In the second quarter, we amended our 12% second lien notes and detached warrants issued in connection with the December 2022 financing. The amendment removed the requirement that we offer to repay the notes on a change of control of the company. Just after the second quarter, we began amortizing and paid down approximately $2.4 million of principal on our first lien debt with Sunstream Bancorp Inc., with the same equal quarterly payments continuing until the final maturity in December 2024, at which point we are required to make a final payment of $50.4 million at maturity. Additionally, We are anticipating a refund claim for the Employee Retention Tax Credit, ERTC program, which we submitted in the second quarter of 2023, which should result in a cash refund of up to $10 million. In addition, we are in the process of selling several non-cash flow generating assets, as well as closing a small mortgage on unencumbered real estate. In total, we could potentially generate between $5 to $10 million in potential proceeds over the remainder of 2023, which we will expect to use to pay down debt. The higher end of the range should become more achievable during 2024, given regulatory requirements and other potential timing risks. And finally, as Michelle will expand upon, our lease liability has been reduced as we have updated certain lease renewal assumptions. To wrap up, I'm incredibly pleased with the strides we have made in strengthening our business since the beginning of the year. As an organization, we are confident that we have strategically identified the initiatives that must be aggressively executed to generate long-term, reliable profitability with our continued focus on optimizing margins. In terms of revenue growth, I would note we are increasing our dispensary-based by about 10% in 2023 and 2024 through developing existing licenses in Virginia and Pennsylvania. And we have the ability to increase production at our global processors in Virginia and Pennsylvania to meet any growing retail or wholesale market needs. In addition, Jushi is in a very unique situation in the industry where our large footprint in Pennsylvania and Virginia including one Ohio store, means that 25 of our 35 store licenses, excluding California, which represents approximately 71% of our retail stores, will likely flip to adult use at some point in the next couple of years. Our cultivation assets in these states are not only our largest, but also the most expandable, as well as being some of the most up-to-date and technically advanced in the country. We are working diligently to make adult use markets happen sooner rather than later in both of these states. Missouri, New Jersey, and Maryland provide analysts with comparable data to come up with scenario analysis that should demonstrate the strong growth we can achieve under these assumptions. If just one of these states flipped to adult use, Jushi would be well-positioned for industry-leading growth and profitability, and we expect the incremental revenue should have much higher margins than existing revenues given the embedded operating leverage in the business. Given the upside in our business and current market conditions, we have no current intention of acquiring any significant assets at this time and are focusing on profitability and debt reduction. Because of our concentrated footprint, GCHE should have many strategic options once the capital markets normalize in our industry. Our current strategy is to focus inward and pursue a significant M&A transaction at an opportunistic time after capital markets normalize. With that, I'll now ask Michelle to review our financial results before we open the call to questions.