Vireo Growth Inc

Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to Vireo Growth Inc. 2024 Results Fall. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. I would now like to turn the conference over to Sam Gibbons, Vice President of Investment Relations. Please go ahead.

Thank you, Dani, and thanks to everyone for joining us. With me on today's call are our CEO and Interim CFO, Josh Rosen, and our President, Amber Shimpa. Today's conference call is being webcast live from the investor relations section of our website. Dial-in and webcast details for the call have also been provided in today's earnings release, which is also available on our website. Before we get started, we'd like to remind everyone that today's conference call may contain forward-looking statements within the meaning of U.S. and Canadian securities laws. These statements are based on management's current expectations and involve risks and uncertainties that could differ materially from actual events and those described in such forward-looking statements. For more information on forward-looking statements, please refer to cautionary note regarding forward-looking statements in today's earnings release. Now I'll hand the call over to Josh.

All right. Thanks, Sam. And thanks, everyone, for joining us this afternoon. I'll begin today's prepared remarks with a review of our second quarter and recent business highlights on slide three of today's presentation, which should be available in the quarterly results and events and presentation section of our Investor Relations website. Our second quarter results reflect continued solid performance across our core markets, and the ongoing commitment to executing our cream and fire strategy with continued strength in margin performance and one of our best quarters of operating income in company history. As a reminder, the cream and fire strategy name refers to the famous phrase, cash rules everything around me, and our focus on producing fire cannabis products that delight our customers with quality and value. Total revenue, excluding discontinued operation and New York, increased 42.5% year over year to $22.5 million. supported by continued tailwinds in Maryland following the commencement of adult use sales last year, as well as same-store sales growth in Minnesota, where we've continued to improve efficiency of operations and quality of product. Margins expanded both sequentially and year-over-year, and while we don't always focus on year-to-date results in our prepared remarks, it's worth noting that the consistency of our execution in the first half of 2024 also helped drive our strongest year-to-date financial performance in company history. even as we work through what's remained a challenging set of circumstances in New York. As Amber will discuss momentarily, during the third quarter, we will begin the anniversary, the launch of adult youth sales in Maryland, as well as the early progress that was made in the initial phases of our cream and fire strategy. So year over year comparisons on key performance indicators will likely become more challenging. However, we are cautiously optimistic about our improved operations and our ability to navigate our most seasonally challenging summer weather environment in our greenhouses in both Minnesota and Maryland, and we're continuing to compete effectively in Maryland's maturing adult use market. As we mentioned last quarter, we were very excited about our recent launch of two new brands of hemp-derived beverage products in Minnesota, and during the second quarter, we secured distribution agreements with both local and national distributors of hemp and alcohol products. For those of you who are not aware of Minnesota's unique regulatory framework for hemp-derived beverages, we've had a front-row seat watching this market evolve and become pervasive across bars, grocery stores, restaurants, and events. The development of our high AF and boundary water beverage brands was a low-risk, capital-light endeavor, which allows us to seed some of our adult-use-leaning brands in market before the launch of adult use. And while speculative at this point, these beverages could become meaningful value drivers if they gain and sustain market traction as we take them on the road. Those of you who know me well know that I am not one to be overly promotional without tangible results. While we don't plan to focus investor attention much on our beverages at the moment, I'm excited about the approach we've taken and the team we've assembled. It's also been fun to watch the excitement across our team and the overall fit with our commitment to cream and fire. In New York, we received our ROM license in July and have begun wholesaling to the recreational use market with vape and edible products and expect to begin selling flower products through the wholesale channel later this quarter. We're also continuing to work through our ongoing divestiture process in New York, although the process is taking longer than we anticipated. Fortunately, Our announcement last week about our 30-month debt extension has given us increased flexibility to optimize this outcome. To be clear, we are still planning on divesting the asset, but now we are doing so with much less pressure. The improved regulatory environment in New York is certainly part of the calculus on this, and it is great to see the state making progress in allowing for a more robust regulated market. We are continuing to work most closely with Ace Ventures as the potential acquirer for New York, although we are doing so without exclusivity as we look to optimize outcomes for Vireo shareholders. To wrap up our review of second quarter and recent business highlights, we were particularly pleased to announce last week that we amended and extended our credit facility with our senior secured lender. The maturity date on our loans was extended to January of 2027. At Chicago Atlantic, our lender also chose to voluntarily convert all of the outstanding convertible notes, which were issued in April of 2023. This was a big milestone for Vireo, and while we still have a lot of work in front of us, speaking for myself, I'm excited to be dedicating even more of my time to building our business, and I was particularly pleased Wichita Galvanic's decision to voluntarily convert their convertible note, saving us both cash interest and future dilution, and solidly cementing themselves as our largest shareholder. Please turn to slide four of today's presentation, where we summarize our strategic objectives for 2024. These objectives mostly reflect continued execution of the key tenets we outlined of our cream and fire strategy. But our focus in 2024 is as much about preparing for 2025 as it is on continued improvement supporting our current operations. As I've said in the past, we're fortunate that these goals largely support one another. We also continue to pursue a positive outcome in our ongoing litigation with Verano. We discussed this at length during last quarter's conference call. I would like to remind investors that stock prices themselves and our market capitalization are irrelevant to the analysis of damages in this situation. It's the damages analysis to our company, not directly to our shareholders. And as is often the case in these circumstances, I believe this kind of cash flows become the most robust choice for such value determinations. It is very clear Verano has a more advantageous cost of capital than we do, let alone access to capital. We believe Verano was calculated with their decision to wrongfully terminate our agreement, and by claiming our breach, they avoided entering any substantive settlement conversations. I believe they did this knowing we had become acutely financially vulnerable through the summer of 2022, with obvious debt maturities on the horizon and the consequences were harsh for virial stakeholders. Next up in this litigation is a hearing on whether our case is suitable for a summary trial as opposed to a full trial. While we believe a suitability finding is justified on the merits and is our preferred outcome, we know it is not guaranteed under the circumstances, which is why we are simultaneously making preparations to support a full trial if needed. We've seen our peers invest significantly to prepare for the adult use activations in Minnesota and New York, while our balance sheet has been compromised. Fortunately, last week's credit disability extension gives us more breathing room to continue executing our cream and fire strategy on a solid, independent path. As our team knows, we have much work left to do And while the debt extension, early debt conversion, and our second quarter results all represent steps forward, we're focused on realizing our long-term potential to capitalize on the opportunities in front of us. That's with prudent capital allocation and investing in and trusting our talent. This industry gets more competitive every day, which means we must also keep improving on a daily basis. That concludes my prepared remarks, and I'll now pass the call over to Amber for some additional highlights from the quarter and a review of our key performance indicators.

Thank you, Josh, and thanks, everyone, for joining us. I'll start on slide five of today's presentation, where we provide an update on our core market key performance indicators during the second quarter. As Josh mentioned earlier, we are beginning to anniversary the commencement of adult use sales in Maryland, as well as the early progress from the initiatives of our cream and fire strategy, which will result in more challenging year over year comparisons moving forward. However, we are optimistic that our improved operations and talent on the ground will help us maintain solid performance in quarter three amidst the more challenging summer greenhouse conditions that we face annually in both Minnesota and Maryland. Trajectory of total flower yields over the course of the last year continues to improve, and on a consolidated basis, same-store sales increased approximately 38% during the second quarter. As we discussed on last quarter's call, growth in Minnesota's medical market has slowed after experiencing very strong growth last year, catalyzed by the introduction of flower products in 2022. This is an expected slowdown, as the market anticipates the introduction of adult use in 2025. But we are very pleased to drive same store sales growth of 7% during the second quarter, which we believe was helped by improved operational efficiencies and our commitment to providing quality and value to our customers. Preparing for the launch of adult use in Minnesota remains a critical focal point for us this year. And as we've previously mentioned, we believe the build We planned to build inventory in Minnesota throughout the year in preparation for the launch of adult use, and this has been a moderate negative impact inventory turns in Minnesota. Moving on to some additional state market updates on slide six. In Minnesota, while we expect the slower medical market to persist until adult use launches, we're taking advantage of this time to invest in enhancing our productivity and preparing our team for 2025. With respect to the timeline of rulemaking and Minnesota's launch of adult use sales, it is our expectation that sales should commence in March of 2025. The first draft rules were recently published and we anticipate final rules to be established in early 2025. We've been reviewing our Minnesota retail locations to identify low capex opportunities to relocate or retrofit our stores to support a successful launch. And we announced last month we are moving forward with plans to relocate our Moorhead, Minnesota dispensary. We have some additional adult use optimization plans in process and plan to share some more details regarding these initiatives later this year. In New York, we received our RON license in July and have begun wholesaling vape and edibles products to the recreational market and expect to begin selling flower products through the wholesale channel very soon. And as Josh mentioned, we are continuing to work through our ongoing divestiture process. In Maryland, our revenue growth is still outperforming the market average year to date. According to the state's disclosures, total market sales in Maryland were up about 130% year-over-year in the second quarter. Our retail revenue was up 182% and wholesale was up 79%, representing total growth of 138% year-over-year. On a sequential basis, the Maryland market was up about 4% and we were up about 1%. Before we conclude today's call, we provided our customary financial detail slides for the second quarter for reference throughout the remainder of today's presentation. Slides 7 and 8 provide summaries of our core market revenue performance and key financial metrics from the second quarter. For a complete review of state-by-state revenue performance, including non-core markets and discontinued ops, please refer to our Form 10-Q, which will be filed with the SEC later today. Slides 9 through 12 contain summaries of our balance sheet, the pro forma comparison, following the extension of our credit facilities, includes current debt outstanding, share capitalization, and EBITDA reconciliation. Please also note that this quarter EBITDA performance includes a $1.6 million gain on the grown road warrants we were issued as part of our collaboration agreement last year. These warrants are marked to market at each period end. which may cause variability in our EBITDA performance in quarters where grown ropes share price fluctuates meaningfully. I'll now hand the call back to Josh for some closing comments.

Thanks Amber, and thanks everyone for participating on today's call. We've had a solid first half of the year and are entering the second half of the year with a lot to be excited about, especially now that we have finalized our debt extension. There's still a lot of work in front of us to ensure our long-term success, But we believe we have a bright future supported by the execution of our teams on the ground in our local markets and our focus on providing quality and value for customers. As we said in the past, we relish being an underdog, and I'm a big believer that cannabis remains a highly immature industry with a wide open landscape for us to be among the big, long-term winners as measured by returns, not necessarily pure size. With that, I think we're ready for Q&A.

Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Your first question comes from the line of Eric Delorier with Greg Hallium Capital Group. Your line is open.

Great. Thank you for taking my questions, and congrats on the continued improvement operationally and on the balance sheet and CAF structure here. My first question is on the KPIs and sort of where you have room to continue kind of eking out improvements. Going forward, you know, understood that the year ago comparisons are becoming more difficult here, but which of the KPIs do you see as kind of having more opportunity for improvement? And if you can kind of relate that back to the drivers being either some of these capital improvements you've made or the augmented team, that'd be helpful just trying to get a better sense of kind of where you're at and where you think you can go with what you have here.

Yeah, I mean, I think it's interesting. I mean, I think first I'm gonna start at 10,000 feet and work down, right? The most powerful kind of profit driver is pricing, uh, works in both directions, but after that it's productivity. And so for us, there's a heavy dose of focus on really leading into our infrastructure, making modest improvements in our infrastructure and driving productivity. And so the KPIs that we, that we share. The total flower harvested and the focus on quality just continues to be the place that we're going to hone in. It has a myriad of benefits, not only just in terms of the fire product side of that from a customer standpoint, but from a volume standpoint, being able to move more quality flower, secondarily having more net biomass to work with from a production standpoint, That dynamic, particularly when you look at a market like Minnesota where we're still a closed-loop system given how the market works here, that dynamic is the most profitable growth that we can have. And so the focus on the top of this from a flower production remains paramount. The gains might not be as easy from here, but there are still a lot of things we are doing to continue to improve on that front, including modest infrastructure investments when they make sense in our greenhouse environments. uh you know first and foremost and so i think you know that's the place of focus the place that might not show up in our kpis but from an internal focus standpoint then is the translation of that into kind of mapping the right product mix when it comes to the infused product side of the equation uh and improving productivity and throughput there uh there's there's room on on both fronts all right that's very helpful appreciate that um um

In terms of the summary judgment trial, do you have any better sense of an idea of when that date might be? It should be within the next four to six weeks. All right, great. And then you had a comment on, obviously, you're continuing to work with Ace Ventures as the most likely acquirer here, but not working with them exclusively. Are you willing to share sort of how overall conversations around divestiture are going? I mean, should we still consider ACE as, you know, I mean, I guess, you know, you did call them the most likely here. I guess my question is, you know, how much should we consider the potential for other buyers to come in? Any kind of commentary around the sort of, you know, activity you may or may not be seeing there would be helpful.

Yeah, I mean, I can't go into too much detail on this one. What I would say is that there's kind of two dynamics to ACE being the more likely One is just the tenure of working with them and the nature of the relationship with the regulator in facilitating the social equity dynamic. The second piece just ties back to having negotiated the ongoing participation in terms of supporting and being able to tie back to the economics that we think are increasingly becoming more attractive in New York. And so that's kind of the underlying logic. There are other interested parties. At the end of the day, the priority continues to be managing what still is a large liability on our balance sheet and just a higher risk factor attached to executing in New York with respect to the rest of our business. And so the priority remains, but given the turn in the regulatory side there, at least the improvement in the regulatory environment and the flexibility that Chicago Atlantic was willing to grant to really allow us to to divest that operation and make the most out of it. We're trying to be careful with that.

That definitely makes sense with the overall improvement we've seen in New York so far, and now you have more time to get this divestiture over the finish line, so that definitely makes sense. Last one for me here, just kind of a bit higher level. We're about to lap the year in Maryland adult use. Just wondering if you can comment on any kind of learnings that you've taken from that market, you know, whether it's on the consumer side or maybe, you know, difference in kind of product mix compared to what you see in your medical markets. Just wondering what kind of learnings, you know, higher level you've seen from Maryland that you may look to now implement in Minnesota. Thanks. Yeah, certainly.

I mean, I think there's team learnings, and I think that the team learning side, I think this is part of when we articulated the cream and fire strategy, it's a lot of what I was hoping I could help bring to the table with the Vireo team that was here. Maryland's not playing out differently than I would have expected from a core standpoint. I've seen these markets mature with limited license structure that are still quasi-limited and what I'd call moderately supply-constrained, and we're no longer nearly as supply-constrained as we were July 1st of last year. And so... everyone in the market gets better. And it's our job to get better faster than the others at the end of the day, at least on the production side. And on the retail side, it's making sure that we're front and center with the customers, understanding where the market is today and where it's going relative to making product allocation decisions, both backwards into our own production facility, but also, obviously, from a wholesale channel, buying from others. And so I think the team did a really nice job of preparing for July 1st of last year, less preparing for the first 30 days and more preparing for the first 120, 180 days in terms of how you manage that supply chain. And we've just continued to try to learn as we go with respect to what the market's telling us. And that's kind of the market side dynamic in terms of making sure we maintain our FIRE philosophy on the getting better every day side of the equation traditional sense, the production engine is still the, you know, the profit driver for us there. And, you know, we've got, as has been articulated, you know, not the most favorable environmental conditions in our greenhouses, particularly through the summer. And so just having made, again, modest CapEx investments over the last 18, 24 months that have really shown up in conjunction with enhanced talent, have really shown up to drive the productivity, so the KPI side of the equation for us, particularly if you were to look back to two years ago in terms of where we are today. And so that's a big part of what I think has helped us perform, call it moderately better than the market, and that's the expectation that we have for our team going forward is just to continue to perform better than the market.

All right. That's very helpful. I appreciate you taking my questions, and congrats again on all the progress. Thank you.

Again, if you would like to ask a question, press star 1 on your telephone keypad. There are no further questions at this time. This concludes today's conference call. You may now disconnect.