Verano Hldgs Corp

Good morning. My name is Devin and I will be your conference operator today. At this time, I would like to welcome everyone to the Verano Corp third quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. If you would like to ask a question, please press star plus the number one on your telephone keypad. If you have any remarks, please press star and then the number one on your telephone keypad.

Thank you and good morning, everyone. Welcome to Verano's third quarter 2022 earnings conference call. I am joined today by George Arkos, Chief Executive Officer and Founder, Brett Sommer, Chief Financial Officer, Erin Miles, Chief Investment Officer, Darren Weiss, Chief Operating Officer, and Rich Terapchak, our Corporate Controller. During this call, we will discuss our business outlook and make forward-looking statements within the meaning of applicable US and Canadian securities laws, which are based on management's current assumptions and expectations. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, and achievements of the business or developments in the company's industry to differ materially from those implied by such forward-looking statements. Actual events or results could differ considerably due to risks and uncertainties mentioned in our filings on EDGAR and CDAR, including our financial statements and MD&A for the quarter ended September 30th, 2022. In addition, throughout today's discussion, we will refer to non-GAAP financial measures that do not have any standardized meaning prescribed by GAAP, such as EBITDA, adjusted EBITDA, and free cash flow. Management believes non-GAAP results are useful to enhance the understanding of the company's ongoing performance, but these are supplemental to and should not be considered an isolation from or a substitute for GAAP financial measures. These non-GAAP measures are defined in our earnings press release and available on our website at investors.verano.com, which also includes the reconciliation of these measures to the most comparable GAAP financial measures. Lastly, all currency is in U.S. dollars unless otherwise noted. Given the ongoing litigation surrounding the company's decision to terminate the acquisition of Goodness Growth Holdings, Inc., we are unable to provide commentary in addition to what has already been disclosed in our 8-K filed on October 14, 2022. Goodness Growth has filed a lawsuit in British Columbia, Canada, seeking damages from Verano. Our response to this suit will be filed later today with the British Columbia Court. I will now turn the call over to George. Please go ahead.

Thank you for joining us this morning. Today, I will cover the third quarter in more detail, discuss updates to our capital allocation strategy, including commentary on our refinance debt deal, and finish with my thoughts on Verano's positioning for future growth. I'll then pass it over to Brett to cover financials before I give a few closing comments and provide a fourth quarter outlook. I am extremely proud of what we accomplished in the third quarter, highlighted by revenue of $228 million, representing sequential growth of 2% and year-over-year growth of 10%. We also generated another quarter of strong, adjusted EBITDA margin of 36%, or $82 million, compared to 34%, or $76 million in the prior quarter. This progress and ability to deliver growth is a reflection of our relentless focus to continually adapt the business in light of industry evolution, especially given the current macroeconomic environment. Adaptive measures we drove throughout the quarter, including evaluating headcount and store operations, while exhilarating the launch of new brands and product offerings, including the introduction of mid and value tier items. Overall, the cannabis industry continues to grow at a time when many other industries are contractive. However, it has also faced its share of challenges. Consistent with other operators, we saw demand and pricing pressures for the third quarter in certain markets, such as Pennsylvania and Florida, which were slightly offset by growth in other markets, primarily New Jersey. New Jersey remains an exceptional market for Verano, with our third and final dispensary, Zenleaf Neptune, opening to adult-use consumers midway through the quarter. We are one of the top wholesalers in the state with wholesale revenue up three times over the prior year, and our dispensaries remain busy and efficient with retail revenue up over five times versus the prior year. We expect to see some normalization over the coming quarters as some of the initial adult use excitement wears off, especially versus peak summer months. Additionally, we saw basket sizes decrease slightly in New Jersey versus the prior quarter, which we believe was due to both the increased proportion of recreational sales and inflation-driven pressures as we fight for wallet share alongside other categories. However, we remain bullish about this state. Looking ahead, we expect our mix of wholesale in the state to increase as newly approved dispensaries slowly come online over the next 12 months. Regarding Florida, first and foremost, we are grateful that all of our employees are safe and accounted for following Hurricane Ian. We continue to wish the people of Florida a swift and safe recovery after this tragic event and are grateful for all the first responders who put their lives at risk during such a dangerous time. We also announced our donation to a Florida relief organization last month and will continue to help any of our employees that has sustained significant personal losses. While we were fortunate enough to avoid significant damage at our cultivation facilities, we did incur damage to some of our dispensaries, forcing us to temporarily close certain locations anywhere from a few hours to a week or so. Most locations recovered quickly. All but one of our dispensaries are now up and running, and we have since seen a period of softness that carried through into the fourth quarter. Outside of this historic hurricane, patient growth for the third quarter tapered, which we generally expect as the Florida medical market matures. Despite this, we continue to see value in strategically opening locations as we position ourselves ahead of an anticipated future adult use market. We opened 11 dispensaries in Florida during the third quarter and subsequently opened two more. Of note, we don't expect to see the full impact of a new store opening for about six months, so we generally absorb higher costs initially compared to top-line acceleration. Looking ahead, we anticipate a slower pace of store openings in the fourth quarter versus the third quarter as we grow increasingly comfortable with our footprint in the current medical market. But we still expect some growth from the 61 Florida dispensaries we hold today. Lastly, while the fourth quarter has historically been strong in Florida, given the state's ongoing large-scale hurricane recovery efforts and the impacts from tropical storm Nicole, we are tempering our expectations for the remainder of the year. We continue to face challenges in Pennsylvania from a pricing and demand perspective related to the increase in state dispensary count, which has grown about 20% in 2022 versus 2021. While dispensary count growth offers us additional wholesaling opportunities, this has also added some additional retail pressures. To combat this, we accelerated the launch of our mid-tier brand Essence to complement our premium reserve brand and expect to launch our value brand Savvy shortly. Throughout the quarter, we are also continuing to phase out the Agritine brand as we focus on scaling our namesake brands that were introduced in the market in August. Through our affiliates, we now have 15 dispensaries in the state with one way to open three more. and we look forward to having the opportunity to realize our full potential in the market once all three value tiers are fully rolled out in the state. We remain keenly aware of the current macroeconomic environment and the impact it has had on consumers. As mentioned on our last call, we pulled forward the launch of Savvy, our value brand, in anticipation of the impact that growing inflation would have on our customers. We have also introduced the Savvy brand across Illinois, Florida, Arizona, Nevada, Ohio, Massachusetts, and Maryland. We are very pleased with the initial results we are seeing following the launch of Savvy, and we will continue to tailor our portfolio based upon market trends. Moving on to our capital allocation strategy, I want to reiterate that we are always striving to be prudent stewards of capital. Given potential recessionary pressures, we are taking further measures that we believe will insulate and prepare the business for a recessionary environment, prioritizing cash flow first and foremost. In addition, we decided to strategically delay CapEx projects that we do not believe will provide immediate term returns as we balance short-term return on investment with long-term growth opportunity. At this time, we prefer to hold cash on the balance sheet to provide flexibility. We will continue to monitor and, as we've done historically, react accordingly as progression towards adult use picks up in certain markets. We also have the optionality to reignite these projects at the appropriate time once adult use programs for certain states become clear and we see the ROI potential develop. Given our prior CapEx range included amounts associated with goodness growth to New York and Minnesota assets, In light of our termination of that acquisition, we expect a much lighter CapEx fund than previously disclosed. We are now targeting $20 million in the fourth quarter and $25 to $50 million in 2023. We have less of our cash flow currently earmarked for certain CapEx projects, and we will continue to take a balanced approach to increasing our cash reserves along with utilizing cash in a strategic manner. With that said, last month we announced the refinancing of our $350 million credit facility through October of 2026. This new credit facility provides us with more flexible terms that we believe can save the business money, such as prepayment optionality and ways through which we can decrease our cost of capital. Specifically, we have the option to prepay up to $100 million of the facility, allowing us to delever at what we believe is a low-cost prepayment fee of $1 million. Additionally, we expect to continue to leverage our unencumbered real estate with the goal of bringing down our blended cost of capital to approximately 10.5% in the medium term. We are very pleased with the extended terms we were able to secure in a rising interest rate environment and believe this is an example of prioritizing our investors' best interests. In terms of future growth opportunities, looking ahead, we also continue to ramp up our R&D efforts as we find ways to target new consumer segments. Earlier this month, we announced the launch of our low-dose, high-function edibles line, BITS, a unique brand platform of five flavor varieties that combines five milligrams of THC, complementary cannabinoids, and functional adaptogens. The initial launch of this product line spans six core markets, including Illinois, Ohio, Nevada, Massachusetts, Maryland, and New Jersey, soon to be followed by Arizona and Florida. In addition to expanding our brand portfolio into new and exciting categories, part of our strategic growth plan includes partnerships and licensing opportunities, such as our recent Ric Flair drip cannabis launch in partnership with Tyson 2.0. We also look forward to the tremendous future growth opportunity in five potential future adult use markets, representing 43 million Americans, where Verano maintains scaled operations and competitive positions. Maryland, whose residents voted just last week to legalize adult use sales in 2023, and Connecticut, which should launch in the next six months, as well as Florida, Pennsylvania, and Ohio. In Maryland, a legacy state for Verano, we have positioned ourselves in advance of adult use legalization, as we have successfully done in Illinois, Nevada, and New Jersey, a key tenet of our strategy. We are ready to go and look forward to working collaboratively with state regulators on next steps to ensure another smooth and successful program launch, and are excited to welcome adult use customers at our four Maryland Zenly dispensary locations. On the M&A front, we'll continue to evaluate opportunities to strategically expand our footprint when and at the time is appropriate. Given some of the macro trends in the industry, especially the challenging headwinds many smaller operators are facing, we continue to evaluate opportunities with a critical eye towards accreted growth. Before turning it over to Brett, I want to touch on the momentum we see building in D.C. We are encouraged by the recent announcement of President Biden to review the scheduling of cannabis and pardon prior federal cannabis possession charges. The President's recent directive is part of what we see as growing positive momentum for the industry. From two new states, Maryland and Missouri, having voted to legalize and sell used cannabis in the midterm elections, to recent signals from Senate leadership that banking reform will pass in the lame duck session, we welcome the normalization of an industry that has been far too long marginalized. We don't anticipate a cannabis scheduling decision in short order, but we understand that the US cannabis market of tomorrow won't be the same as it is today. We will continue to have conversations and explore every avenue so that we are best positioned to capitalize on any opportunities that present themselves on the legislative front. In addition, we will continue to push forward with certain partnerships that help to shape the new narrative. We have never been more bullish of movement at the federal level. That being said, our success does not and has never depended upon changes in the federal level, and we are as confident as ever that we can execute irrespective of potential movement. Finally, at the state level, the New Jersey Assembly recently passed a bill that would exempt cannabis companies from the 280E tax code. This bill heads to the state Senate next for consideration, but so far we are also encouraged by this positive action. And now I'll turn it over to Brett to discuss the financials in more detail, after which I will provide some closing comments.