Yahoo Finance The Cannabist Company Holdings Inc. (PNK:CBSTF) Q1 2024 Earnings Call Transcript
The Cannabist Company Holdings Inc. (PNK:CBSTF) Q1 2024 Earnings Call Transcript May 9, 2024
The Cannabist Company Holdings Inc. misses on earnings expectations. Reported EPS is $-0.08 EPS, expectations were $-0.05. The Cannabist Company Holdings Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to The Cannabist Company First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Asia Gilbert [ph]. You may begin.
Unidentified Company Representative: Thank you, operator. Good morning, and thank you for joining The Cannabist Company's First Quarter 2024 Earnings Conference Call. With me today is Chief Executive Officer, David Hart; President, Jesse Channon; Chief Financial Officer; Derek Watson; and Senior Vice President of Capital Markets and Investor Relations, Lee Ann Evans. Earlier this morning, we issued a press release reporting our first quarter 2024 results. 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. Certain remarks we make today regarding future expectations, plans and prospects for the company constitute forward-looking statements within the meaning of applicable Canadian and US 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 details in the Risk Factors section of our annual Form 10-K for the year ended December 31, 2023, which have been filed with applicable regulatory authorities. 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 EBITDA and adjusted EBITDA.
A cannabis-growing operation in a large, industrial greenhouse.
These measures do not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies. The Cannabist Company 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 David Hart to get us started. David?
David Hart: Thank you, Asia. Good morning, everyone, and thank you for joining us today. We're pleased to discuss the results for the first quarter and more importantly, share how our team is driving this business forward in 2024 and beyond. As we outlined on our fourth quarter earnings call in mid-March, we've clearly defined our mission for 2024, to build a better company not just a bigger company. To that end, we've established 4 key areas of focus. First, is enhancing the customer journey for existing medical and adult use customers today, as well as for the new customers of tomorrow as cannabis transitions to adult use in more of our markets. Second is capturing supply chain efficiencies and sweating the retail, cultivation, and manufacturing assets that we've already invested in.
We're actively working to leverage the underutilized capacity through wholesale growth and strategic partnerships with third-party brands. Third, we will capitalize on the next chapter of cannabis evolution as adult-use adoption leads to increasing TAM and creation of new market segments. And fourth, we will continue to improve our capital structure to ensure our ability to grow responsibly over time. I'm pleased to report that we have made and continue to make meaningful progress on each of these initiatives. We are doing so from the ground up. As I mentioned last quarter, Jesse and I have been actively meeting with our leadership across the retail cultivation and manufacturing parts of our business. Those who are on the front line of our operations across the company have the clearest line of sight to what we need to do and what needs to be improved.
Some of their ideas are small, some are large, but collectively they are transformational. We are changing the structure of the organization to drive changes efficiently and we are implementing the systems and software solutions to support greater transparency, connectivity, and generation of insights to help steer the business. We're also making concerted efforts to enhance company culture as we engage the team in this new chapter. As a result, the organization is aligned, empowered, and excited to build a better business and our momentum is building. As examples of our progress, let me highlight a few key developments we achieved in the first quarter, which we view as the green shoots indicative of early progress towards our goals. Regarding margins, we achieved a 500 basis point improvement in adjusted gross margin in Q1 compared to the fourth quarter of 2023 and improved adjusted EBITDA by more than 250 basis points over Q4.
These improvements were driven by asset utilization, improved margins at the retail level to growing lands in brand partnerships. On wholesale, we saw a substantive improvement in wholesale margins as well as a decrease in the overhang from underutilized facilities that we have previously referenced. We launched new strategic brand partnerships in the quarter, substantially broadening our wholesale product offering and increasing the mix of finished goods. On balance sheet management, we completed a convertible debt offering in March in order to satisfy the remainder of our May 2024 maturity. We reduced the principal of our 2025 maturities through an exchange, and we continue to implement cost-reduction initiatives at the corporate level. We also completed the exit of a non-core market with the closing of the asset sale in Utah.
And we continue to evaluate any underperforming assets in our portfolio. As you can see, we are making meaningful progress across our organization. One of the biggest initiatives is the improvement in our wholesale operation, not only honing it in to run more efficiently, but also to run it more profitably by shifting our mix towards finished goods and by partnering with select brands to augment our product offering. In just a few minutes, Jesse will provide more details on our wholesale and partnership efforts. Before that, however, I would like to address the recent reports regarding the potential decision by the DEA to recommend the rescheduling of cannabis to Schedule 3 from Schedule 1. As is likely lost on no one listening to this call, we are witnessing a historic change in policy at the federal level.
While the timeline remains uncertain, the rescheduling of cannabis has far-reaching impacts on our industry, undeniably for the positive. With the reclassification to Schedule 3 and the resulting end of 280E, the entire industry will benefit from a more normative cost structure substantially lowering our cash tax costs, freeing up capital and cash flow for debt reduction and investment in growth. I have to say we look forward to shedding the disproportionate tax burden. Derek will address the company's outlook related to 280E momentarily. At the state level, we continue to expect a number of our markets to flip to adult use such as Ohio, Delaware, and Virginia. We are aggressively positioning ourselves for success in these markets. We also continue to expand in states that have more recently transitioned to adult use such as New Jersey and Maryland, where we are growing both the wholesale business and our retail footprint So let me summarize where we are and where we are going.
First and foremost, we have a strengthened strategic focus. We are moving fast. We are prioritizing profitability, enhancing cash flow, reducing underutilized capacity, strengthening our balance sheet, and building a sustainable business. We will continue to capitalize on the strategic footprint with a specific focus on evaluating the potential of non-core and less profitable assets. We are leaning into the most profitable markets and those that have future optionality to drive growth. Supporting this effort is a key focus on improving operational efficiencies through better systems and processes, especially in retail and back of office functions. In turn, this will drive better financial health through cost reductions and effective capital allocation.
Most importantly, we will continue to align our strategies with market demand, focusing on higher-margin products and partnerships to drive sustainable shareholder value over the midterm. We look forward to continuously implementing operational improvements and exiting 2024 in a materially improved position poised to compete more effectively. With that, I'll now turn the call over to Jesse to give you more color and some of the play-by-play. Jesse?
Jesse Channon: Thanks, David. As mentioned, we are driving to build a better business by empowering our team across the enterprise to implement change, drive efficiencies, improve customer service, drive profitable growth, and partner with the best brands to fully leverage our capabilities in both retail and wholesale. I'd like to spend a few minutes zeroing in on some of our initiatives. First and foremost, our plan is to grow wholesale profitably. What we know to be true and what we've begun to successfully pursue is that we have embedded potential for substantial margin expansion. We are exercising new discipline in wholesale, deferring deals where the economics do not work in our favor. We turned away on profitable business in Q1, which is evident in the 10 percentage point improvement in wholesale margins over the prior quarter.
We are not going to pursue top line at the expense of the bottom line and we have more margin to go after. We are substantially increasing the mix of finished goods in our wholesale inventory using both first and third party brands as finished goods command higher pricing than bulk flower sales. And by partnering with strong brands that are in demand, we not only move the product, which we have grown, reducing some of our underutilized capacity, we also expand our margins. As you've seen over the past few months, we've announced partnerships with a number of successful brands. Our collaborations include partnering with Airo Brands in Virginia, West Virginia, Delaware, and Pennsylvania; partnering with Revelry Herb Co., In Massachusetts and New Jersey with Pennsylvania, Maryland, New York, and Ohio growing out over the next few months.
We're introducing Flower by Edie Parker in 6 markets, Arizona, California, Colorado, Delaware, Florida, and Virginia, and launching a new line of edibles in Illinois, Massachusetts, New Jersey, and New York and we continue to expand our partnerships launched in the fourth quarter of 2023 with both Old Pal and ButACake. These third-party partnerships are generating positive indicators for our wholesale and retail segments. The substantial mix shift towards finished goods along with these powerful brands is creating strong demand from our wholesale partners. So not only are we seeing a shift in mix towards finished goods, we're also seeing new wholesale customers. The partnerships are proving to be an incrementally positive tool in the toolkit for our wholesale teams in the markets where they've launched and they're driving some incremental foot traffic for retail.
We're still in the very early innings, but the green shoots we are seeing today are a leading indicator of what we expect to see in the remaining 3 quarters of this year as we expand our wholesale strategy, improve retail experience, continue to reduce underutilized capacity and bring these powerful brands to new markets. With that, I'll turn the call over to Derek to discuss our financials.
Derek Watson : Thank you, Jesse, and good morning, everyone. I'll provide a summary of the key financial results for the first quarter, discuss trends in our market, and comment on our continuing initiatives to strengthen the company. For the first quarter, we achieved $122.6 million in revenue, down 4.5% sequentially and a somewhat expected seasonal decrease over the fourth quarter of 2023. As David and Jesse have mentioned, this was achieved with a more disciplined approach to margin improvement in both our wholesale and retail businesses. We continue to see a decrease in retail average basket size but to a lesser extent than in the prior quarter. Wholesale revenue decreased slightly in dollar terms to $15.4 million representing 12.5% of total revenue in the quarter.
However, consistent with our focus on margin improvement, wholesale margins increased 10 percentage points over Q4, and we also saw our retail margins increase 2 percentage points. This led to adjusted gross profit in the first quarter of 48 million, up nearly 10% over the prior quarter and flat year-over-year. Adjusted gross margin of 39% in Q1 represents a 5 percentage point improvement over the fourth quarter when we implemented a deliberate inventory reduction strategy as we highlighted at that time. In the first quarter, we recorded an adjustment of $5.4 million to revalue inventory specifically in the New York market that continues to be negatively impacted by the uncontrolled illicit market. We continue to experience an overhang from unabsorbed overhead in underutilized production facilities, as we've previously discussed, and in the first quarter, that overhang declined to a 4.2 percentage point impact on gross margin.
The improvement in utilization was spread across multiple markets as our initiatives take hold with the largest contributors being in Ohio, Colorado, and New Jersey. We're encouraged by the improvement in gross margin achieved through price discipline, beneficial changes in product mix and increased utilization and see this as an early indicator of solid progress. Adjusted EBITDA in Q1 was $15.3 million, an increase of 22% sequentially with adjusted EBITDA margin improving to 12.5% compared to 9.7% in the fourth quarter. Cash from operations was a negative $6.2 million in part due to the timing of certain interest and other cash payments due in the first quarter and a $5 million build in gross inventory as we prepared for the launch of our new first and third-party products.
CapEx in the quarter was a little under $1 million and we expect the continuation of CapEx at these lower levels, averaging around $2 million to $3 million per quarter over the medium term and primarily supporting new store openings and enhancements to our manufacturing capabilities. No new stores were opened in Q1, and we have 85 active retail locations as of today, having completed the sale of our Utah assets in the quarter. We still have 4 new retail locations in development, one in Maryland, one in New Jersey, and two in Virginia, in order to reach our maximum license caps in each of these states and are also preparing for the opening of additional stores in Ohio as that market transitions to adult use. We ended the first quarter with $45 million in cash, boosted by a $25.8 million private placement for convertible notes due March 2027 and which generated net cash proceeds of $14.8 million.
The primary use of cash proceeds will be to settle the remaining $13.2 million of 13% notes maturing on May 14, 2024. Pursuant to this transaction and the debt-to-equity transaction announced in January, we also reduced our 2025 convertible note maturity by $15 million in the quarter. The principal remaining on these 6% notes is now $59.5 million with up to another $15 million potentially converting by the end of June, subject to share price consideration. Our actions to reduce overhead included a corporate reduction in the first quarter, and we continue to assess opportunities to reduce overhead costs to more appropriately match the scale and scope of our operations. We'll continue to target initiatives to improve cash flow, further delever the balance sheet, and reduce interest expense.
This may include further divesting of non-core or underperforming assets in the portfolio, all of which are under review as we've mentioned. Lastly, a comment on 280E and the related tax impact. Although the timing of federal rescheduling remains uncertain, we previously stated that if 280E were to no longer apply, our current annual tax liability would decrease by around $30 million. Separately, we're in the process of pursuing potential tax return amendments and refund claims associated with 280E related to prior tax years and will provide further updates when they're available. Again, I would like to underscore our key financial priorities. They remain driving improvements in gross margin, EBITDA, and operating cash flow while proactively managing our balance sheet.
In the medium term, we continue to pursue adjusted EBITDA margins that drop above 20% during 2025. And as we've noted, we do not expect the path to be linear. The team remains focused on executing against these goals, and we're encouraged by the green shoots we've described during Q1. With that, let me turn the call back to David Hart for final comments. David?
David Hart: Thank you, Derek. Before we take questions, I want to reiterate that we are making material changes to our business, so that we end this year in a much better position competitively and financially. We will see more progress in the coming quarters. We were encouraged by the green shoots in Q1, which are continuing to grow in Q2. I look forward to taking your questions. Operator, please open the line.
See also
16 Biggest Publicly Traded AI Companies in the World and
25 Largest Companies in Mexico by Revenue.
To continue reading the Q&A session, please click here.
