Verano Hldgs Corp

Music Music THE END THE END Thank you. Good day, and thank you for standing by. Welcome to the Verano Holdings second quarter 2021 earnings conference 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'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Aaron Miles, Chief Investment Officer. Please go ahead.

Thank you and good morning, everyone. Welcome to Verano's second quarter 2021 earnings conference call. I'm joined today by George Arkos, Chief Executive Officer and Founder, and Brian Ward, Chief Financial Officer. During this call, we will discuss our business outlook and make forward-looking statements, which are based on management assumptions and expectations. Actual events or results could differ considerably due to risk and uncertainties mentioned in our filings with CDAR, including our financial statements and MD&A for the fiscal year ending December 31st, 2020, and our financial statements and MD&A for the three and six months ended June 30th, 2021. In addition, throughout today's discussion, Verano will refer to non-IFRS measures that do not have any standardized meaning prescribed by IFRS, such as EBITDA, adjusted EBITDA, and free cash flow. These non-IFRS measures are defined in our earnings press release issued earlier today and available at investors.verano.com, which also includes the reconciliation of these measures to the most comparable IFRS financial measures. Please note the financial information is reported on a pro forma consolidated basis as if the Altman acquisition had closed on January 1st, 2021, compared to the actual closing, which occurred on February 11th, 2021. As a point of clarification, the financial statements we filed on CDAR are in accordance with IFRS, which includes the contribution from AltMed beginning on the day of the actual closing of February 11th versus the beginning of our fiscal year on January 1st. With that being said, results will differ between IFRS numbers filed with CDAR and the pro forma consolidated numbers reported today. Lastly, all currency is in U.S. dollars unless otherwise noted, I'll now turn the call over to George. Please go ahead.

Good morning, everyone, and thank you for joining us. I am extremely pleased with what we accomplished in the quarter, one that was instrumental relative to the foundational pieces that we've added to our portfolio to firmly establish our position as a top operator in the space and to drive long-term growth and profitability. On our last earnings call, we guided top-line revenue approaching $200 million, and we are very pleased to announce Q2 revenue of $199 million, representing 39% of sequential growth, which notably did not include contributions from the AgriKind acquisition, which we had anticipated closing in the quarter, but instead completed in July due to regulatory delays. Overall, since going public in February, which included the closing of the transformative Altman transaction, we have announced 11 additional acquisitions and already closed on 10. Given the combination of our unprecedented activity, highlighted by significant cultivation expansion, a multitude of new dispensary openings, and most of all, substantial M&A, we expected there would be some measure of choppiness in the quarter. Despite an otherwise strong quarter as a result of our extensive activity on the M&A front, The financials we reported included some margin compression due to the one-time accounting impacts associated with integration across multiple transactions. These included significant one-time inventory markups across three high-volume dispensary groups, the Healing Center in Terra Vida in Pennsylvania and Territory in Arizona, accounting for nine storefronts, which adversely impacted cost of goods sold in the quarters. In addition to inventory markups, we were subject to a negative impact of IFRS accounting treatment of our biological assets in the quarter. Through focused R&D, we've enhanced our cultivation methods, which we believe over time will increase yields while reducing plant counts and costs attendant to maintaining a higher plant count. Though we don't anticipate a near-term top-line impact from an accounting perspective, we had to absorb a steep decline in the value of our biological assets, which again, adversely impacted our cost of goods sold in the quarter. Going forward, we anticipate an increase in the valuation of biological assets as new cultivation methods are deployed. We believe there is solid runway ahead of us in Pennsylvania with vertical migration coming online last month. The delayed closing of agro-kind not only hindered top-line performance, but prevented margin expansion as it deferred our vertical benefit realization in Pennsylvania to the third quarter. Excluding the impact of these one-time accounting items and the delayed agro-kind closing, our margins in the quarter would have approached our signature profile. That said, the unadjusted EBITDA margin posted in our financials was 26% and 41% adjusted, which is very strong relative to industry standards. Looking ahead, we remain confident in our strategy, operations, and people, and we are incredibly optimistic about the future for Verano. We will continue to be assertive in support of our strategic vision for the company, and to close out the year, we anticipate approaching a $1.1 billion revenue runway with a margin profile nearing former levels. Turning to a more detailed review of the quarter, as I mentioned, we are very pleased to report $199 million in revenue, representing a 39% sequential lift and 164% year-over-year growth. Revenue from retail versus wholesale was 78% and 22% respectively, with retail revenues increasing 114% year-over-year, while wholesale revenues increased 29%. Verano also delivered $32 million in net income, excluding the impact of biological assets. and $81 million in adjusted EBITDA in the quarter. Our gross profit margin, excluding biological assets, was 50%. Although this is somewhat lower than we had targeted, as I highlighted a moment ago, several significant one-time events pushed margins below our signature profile for the quarter. We are confident that this compression was circumstantial and, again, anticipate closing out the year at a level closer to our signature profile. Despite the one-time impact of the events I described, we achieved strong overall financial results while maintaining focus on strategic execution and continued growth in key markets through sound operations and disciplined capital allocation. We also made tremendous headway on several fronts, while maintaining a healthy balance sheet ending the quarter with $150 million in cash, and we remained unencumbered by sale leasebacks. In addition, as discussed in our first quarter earnings call, our financial health has been enhanced by the upsizing of our credit facility by $100 million and an industry-best 9.75% on a non-dilutive basis. We firmly believe that we will be able to meet our cash obligations going forward. Should the need arise for additional funds, we do not anticipate using dilution of our stock to raise capital. Instead, we would explore non-dilutive options, such as additional debt, seeking improved terms in relation to our current facility, and we remain under levered compared to industry standards. We have also implemented a new strategy for investment in CPG branding and product innovation through R&D, and we continue to evaluate accreted acquisition targets to further develop core geographies, which are key to our long-term vision for the company. Now I'll walk you through the progress we've made in expanding our retail footprint and wholesale capacity in more detail. Starting on the retail front, our organic growth was highlighted by the opening of seven new dispensaries in the second quarter, including three in Florida, two in New Jersey, one in Pennsylvania, and a flagship storefront in the heart of Chicago. We expanded our retail footprint further through acquisition, adding nine fully operational dispensaries to our portfolio in the quarter. resulting from deals closing in Arizona and Pennsylvania. This included six storefronts in Pennsylvania between Terra Vida and the Healing Center, each of which holds three of the top performing dispensaries in Philadelphia and Pittsburgh respectively. After Q2, we brought two additional dispensaries online in Pennsylvania and another in Florida, bringing Verano's total active retail footprint to 83 dispensaries as of today. which includes two recently announced medical recreational storefronts acquired in Reno and Carson City, Nevada, pending the close of the Sierra Well transaction. Of note, we have maximized our retail footprint in New Jersey with three locations, and we are well positioned for the onset of adult use sales with our completed, state-of-the-art 120,000-square-foot cultivation facility. Staying ahead of market growth, especially in states trying for adult use transition, has and will remain a strength of the company. Importantly, across our retail channel, the average number of daily visits to Verano stores increased from approximately 7,000 in the second quarter of last year to more than 18,000 this quarter, with proven efficiencies based on same store daily transaction growth of 76% year over year. We are currently projecting to end the year with more than 90 active dispensaries. This represents an increase from our previous approximation of 85 stores as we continue to execute exceptionally well on our retail expansion plan. We see significant opportunity for continued growth in our retail business as we enhance and refresh our brand portfolio, position ourselves for adult use transitions in core markets such as New Jersey and Pennsylvania, and add to our retail footprint where permitted. On the wholesale front, sales were up 29% from the same period last year. We continue to invest in cultivation expansion in line with market demand and currently have 806,000 square feet of active cultivation nationwide. In the near term, we expect our state-of-the-art multi-tier 26,000 square foot indoor cultivation facility in Massachusetts to come online in the third quarter. But we anticipate realizing vertical benefits starting in Q4. With that, we will achieve vertical integration in nine of 11 operating markets, and lift total cultivation capacity to 832,000 square feet. Upon close of the Sierra Well deal, we will add another 10,000 square feet to our total. Looking ahead, in West Virginia, we are one of a select few that is licensed for vertical operation, and we are taking a phased approach in building out a 40,000 square foot cultivation facility. In Pennsylvania, we currently have 62,000 square feet of active cultivation through our acquisition of AgriCline, which closed in July. As in West Virginia, we are taking a phased approach to develop a second permitted large-scale cultivation facility under the Agronomic Biologics License, providing substantial capacity expansion in the Keystone State. In Florida, we have approximately 220,000 square feet of active cultivation, and similar to Pennsylvania, we have a second large-scale indoor facility with space for considerable expansion currently in development. Of note, following the completion of cultivation construction in Florida, Pennsylvania, we will eclipse 1 million square feet of indoor capacity nationwide. I want to reiterate the importance of Verano's balanced strategy, driven by a focus on both retail and wholesale channels, where we anticipate the revenue split, which skewed heavily toward retail in the quarter, leveling out as we move forward. Each one not only provides an avenue for top-line growth, but our realization of vertical benefit also creates meaningful operational efficiencies, which should enable us to produce industry-leading margins upon completion of integration efforts. In limited license states, our wholesale presence should position us to outpace markets, even after we've maximized our retail footprint, as we believe our continued investment in premium brand and product development will generate sustainable consumer demand. Turning to our investment in CPG brand strategy development and consumer experience. As market conditions evolve and the widespread adoption of adult-use cannabis policies expands addressable consumer populations considerably, we have measurably increased investment in our brand portfolio and the enhancement of our product lines. For starters, our legacy edible brand, Encore Edibles, is currently undergoing a top-down brand refresh in parallel with sweeping R&D to enhance flavors, formulas, and overall consumer experience. we anticipate a coordinated nationwide relaunch in the coming months. Similarly, we are reformulating multiple extensions of the Avexia wellness brand, including tablets and tinctures, as well as a packaging redesign. We are targeting the refreshed offering to hit retail shelves in 2022. To build on our legacy brand portfolio, meet the needs of a growing consumer base, and further secure our position in the market as a CPG leader in product development and innovation, work is underway to develop a slew of new brands, including a wellness-forward edible line geared toward millennial consumers. Across our brand portfolio, we are committed to continuous improvement in product quality and consumer experience. We continue to deploy resources on the development of proprietary flower strains driven largely by in-house breeding. Our G-Line offering, a portfolio of crossbred strains hinged on our top-selling cultivars, has been well-received across our footprint. With eight G-Line strains already in market and generating positive reviews, we have a roadmap for continued innovation in breeding and will introduce new strains to the market on a regular cadence going forward. As the world continues to go digital, so do the ways consumers connect to brands. We are investing in a full funnel digital ecosystem. This includes a new and much improved Verano website that is expected to launch in Q1 next year, a long-term search engine optimization strategy to increase visibility, and we are in test development stages of a custom in-house mobile app. Together, these initiatives are intended to enhance the brand experience, educate consumers, and increase awareness and engagement in the market, from both novice to experienced cannabis consumers. Before I turn the call over to Brian, I want to take a moment to discuss the current U.S. regulatory environment. We are very pleased with a continued dialogue around cannabis policy reform at the federal level. We welcome these discussions, as Verano has made it a priority to be a part of the broader collective of voices helping to shape the legal framework for the future of our industry. We are committed to being a part of the process, especially as we all work together to ensure a more equitable landscape in the cannabis market. As with any change, this process will require patience, but by no means is our success or strategy dependent upon federal legalization or any other regulatory change. We believe federal legalization could create new opportunities for Verano and drive further efficiency, but we have plenty of runway ahead of us, assuming zero legislative changes. Our business has been operating and thriving for years within the current complex regulatory framework, which differs state by state. and fewer federal restrictions only provides further outside optionality to our business. We will continue to grow our operations while also actively participating in the conversations around federal legalization. So while we are excited about the possibility of reform that could help us to further expand the business, deliver additional shareholder value, and create more well-paying jobs, as well as giving more back to our communities, I would like to reiterate my confidence in the following statement. Our capacity to deliver on these critical functions is not at all dependent upon transformation of federal policy. With that, I will now turn the call over to Brian to provide more detail on our financials before making closing remarks.