The Cannabist Company Holdings Inc. (PNK:CBSTF) Q4 2023 Earnings Call Transcript
The Cannabist Company Holdings Inc. (PNK:CBSTF) Q4 2023 Earnings Call Transcript March 13, 2024
The Cannabist Company Holdings Inc. misses on earnings expectations. Reported EPS is $-0.18 EPS, expectations were $-0.06. 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: Good day, and welcome to The Cannabist Company's Fourth Quarter and Full-Year 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. Later we will conduct the question-and-answer session and instructions will be given at that time. As a reminder, this call is being recorded. I would now like to turn the call over to Asia Gilbert [ph], Director of Investor Relations. You may begin.
Unidentified Company Representative: Thank you, operator. Good morning, and thank you for joining The Cannabist Company's fourth quarter and full-year 2023 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 fourth quarter and full-year 2023 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 U.S. 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 will be 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 Q4 and the full-year 2023, and more importantly, share how our team is driving this business forward in 2024 and beyond. I'm excited to be here at the helm as CEO, joined by a dedicated management team, who is passionate about representing our outstanding employees across our 15 U.S. markets. We remain confident in the value of our strategic position and our focus on sweating our assets to deliver for our customers, partners, and shareholders alike. You may recall that in Q3 of last year, once we were free to operate as a standalone company following the arduous 16-month process, we undertook a number of initiatives to best position the company going forward.
During 2023, we announced and continue to implement our balance sheet improvement plan, which has already resulted in a decrease in interest expense, reduced leverage and positioned us to satisfy upcoming maturities, including $13 million remaining in May 2024. As part of that effort, we took steps to increase inventory monetization, reduced working capital needs and drive cash flow. This work continued in the fourth quarter as we monetized certain excess inventory, which had a temporary impact on margins, but contributed to a healthier cash position at year-end. We completed the fourth phase of our previously announced corporate restructuring program contributing to annualized savings of over $38 million. We began to optimize our seller portfolio of assets with a focus on those markets that will drive growth and profitability going forward.
To date, we have exited markets such as Missouri and Utah, and we look to lean in where we believe we can drive the most value. We launched our dedicated wholesale effort to capitalize on their national footprint and cultivation potential, which Jesse will discuss in more detail. We rebranded the company from Columbia Care to The Cannabist Company and we leverage our expansive retail presence, rolling out purpose-driven new products and brands across our shelves as we prepare for additional markets to transition to adult use, such as Ohio, Delaware, and Pennsylvania. We are committed to continuously improving our operations, implementing changes in our systems to increase efficiencies wherever possible and building a winning culture to exit 2024 in a much better position to succeed as a team.
We're being thoughtful about our footprint, and we can best capitalize on the tremendous opportunity before us as we see more of our markets transition to adult-use. One of the first and most important steps to success has been to ensure that we have the right people in the right jobs with the right tools. This is something that Jesse and I are highly focused on as we understand the importance of winning at the hyper-local level. To that end, Jesse and I have been meeting with local executives across the company to read out inefficiencies, hear from the front lines on how to improve our processes and empower them for success. You will hear more about these initiatives in the coming quarters and should see the evidence of positive changes in each of our facilities.
Next, as we look to maximize our existing cultivation and manufacturing footprint, we've reworked our organizational structure and go-to-market strategy for wholesale. Wholesale has been underrepresented as a portion of total revenue for the company at 12% of total revenue in 2023, and we are looking to change that. Over time, we have invested significant CapEx dollars in creating an enviable portfolio of assets throughout our markets. We are built for adult-use and ready for those transitions with little to no additional CapEx required as those markets flip. However, at present, many of our largest facilities are underutilized, creating a significant drag on our gross margin, which we discussed in prior quarters. To address that, you should expect to see us strategically ramping up wholesale across the portfolio and continuing to engage in key partnerships that will complement our own in-house brands to complete our product mix in retail and strengthen our wholesale product offering.
You've seen a number of partnership announcements from us to date, and there are more to come. While 2023 was the year of transition for The Cannabist Company, we produced consistent top line revenue of $511 million with an improvement in adjusted EBITDA over 2022. This year, 2024 is not about chasing top line growth. We are focused on margin improvement, cash flow generation and long-term sustainability. Our primary goals for 2024 are to materially improve our financial profile, and company culture so that we can capitalize on the massive opportunities ahead for the cannabis industry. We're still in early innings, and we will be positioned for long-term success. To reiterate, the first step is to have the right team in place. That task is completed and I could not be happier than to be working with the team that we have.
The energy, commitment, and frankly pure grit in our organization is absolutely inspiring. We have great leaders and great people in the front lines driving continuous improvements. As we move forward, we're focused on four key initiatives. Number one, 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. Number two, capturing supply chain inefficiencies and sweating the retail cultivation and manufacturing assets that we already have invested in. We will leverage the underutilized capacity through wholesale growth and selected partnerships with winning brands. And number three, capitalizing on the next chapter of cannabis evolution as adult-use adoption leads to increasing TAM and creation of new market segments.
And number four, continuing to improve our capital structure to ensure our ability to grow responsibly over time. The successful execution of this strategy will result in leaner operations, improved inventory management, and enhanced cash flow, ultimately driving sustainable profitability and shareholder value. Before I turn the call over to Jesse, let me just recap where The Cannabist Company is doing. We're exceptionally well positioned in the markets that are poised to transition to adult-use with states like Ohio, Delaware, and Pennsylvania all in the cusp. We've made the necessary investments in cultivation, manufacturing and retail, and the opportunity remains to sweat those assets to drive returns with very little additional CapEx required.
We have incremental opportunities and additional product brands to complement our assortment and turning our wholesale business into a value creation machine and empowering our team members on the front line to focus on providing the best customer service and experience possible. Broadly, we are reevaluating every aspect of our business. If something isn't working, we will address the issue head-on. With that, I'll now turn the call over to Jesse to give you more color in some of the play-by-play. Jesse?
Jesse Channon: Thanks, David. In 2023, we made considerable progress as a company that enabled the clear direction we have now. As we engaged in detailed examination of our business, looking for ways to optimize our portfolio of assets and take advantage of the improvements we made during our corporate restructuring. In addition to rebranding at the corporate level to the cannabis company in late 2023, we made strides on the product branding front, expanding the reach of our in-house brands in markets like Virginia and Florida and reengaging with third-party brand and product partners. In the fourth quarter, we saw sales of our in-house brands increased once again to 51% of retail sales. New brand launches in 2023 included heavy edibles across our markets, Seed & Strain and Classix in Florida as well as Triple Seven in Virginia.
We also standardized and expanded our edibles offerings under our national heavy brand with products such as effect-based edibles. Customers can expect to see more unique and creative products like this as we continually strive to ensure that there is something for everyone on our shelves. During the fourth quarter, we also announced several strategic commercial partnerships launching collaborations with Old Pal in Maryland and Virginia, Airo brands in Delaware, and an expanded partnership with ButACake, introducing its cannabis-infused edibles to New Jersey. These partnerships expand our product offerings to customers and create additional revenue streams while increasing our manufacturing capabilities and efficiencies. We are very encouraged by the customer reception of these brands and the demand they've generated as they enter new markets.
In short, it's working, and we look forward to what's coming next. While I'm proud of the progress we made in 2023, we have so much more ahead of us. Our focus going forward is building a better business, not just a bigger one. We are working to enable our business from the ground up. This means empowering our team members who are closest to the customer. We are shifting our approach to how we operate in retail, how we make decisions in our facilities, how we solve for addressing customer needs, and most importantly, how we interact with our biggest asset people. And I can tell you today, we are putting in the work to ensure this commitment is felt and seen throughout the entire business. To put it bluntly, we are committed to doing a better job operating within our four walls.
Our dedication to providing an elevated customer experience in both retail and wholesale has not changed, and this requires a bit of agility on our part. We want our customers to view us as a trusted partner that can help them make educated decisions about the products we have to offer, which will be increasingly important as we see the next waves of cannabis normalization coming. This next chapter for The Cannabist Company requires a thoughtful approach to decision-making and entrusting the subject matter experts, our people to play a greater role in our success. And our gardens we're using the increased efficiency and quality of our facilities to produce some of the best products we've ever made. We're thrilled about what we've seen coming out of our cultivation and manufacturing facilities, and we look forward to bringing these products to market through our reinvigorated approaches to wholesale and retail with purpose-driven products that we know are in demand.
The way we have historically viewed wholesale has changed, as we shift our approach, we're encouraged by the progress we're seeing in wholesale prices, thanks in part to our higher-quality products and a shift in product mix, and we look forward to providing updates on our growth in market share in 2024. In retail, finding a balance between a loyal customer base that wants a more engaged in educational shopping experience, while not alienating the customer that prefers a more hands-off approach as our North Star and our retail associates serve as an incredible source of information we can leverage to get closer to that objective. By attracting, retaining, and empowering talent that is passionate about their work, the company and the plant will gain in-depth hyper local knowledge of customers' preferences and market dynamics.
Using the insights we gain from retail, we can re-envision the way we commercialize our internal brands and approach to strategic commercial partnerships and deliver purpose-driven products based on consumer demand. We are partnering with flagship brands that fit our product portfolio and that customers will love. These collaborations can help us create an unmatched product offering that addresses the needs of every aspect of the market. We want The Cannabist Company to be the preferred platform for growth, serving as a trusted partner in evolving the cannabis market, present and future. The second half of last year forced us to reflect and in 2024, we are improving the way we do business. The execution has already begun. We're evolving as a company and prioritizing long-term strategic initiatives that will yield the best results for the business and our shareholders.
As I like to say, the trend has to be your friend and we are working to ensure that we future-proof the organization and can successfully navigate the many phases of growth that still await this industry. 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 fourth quarter and the full-year, discuss key trends in our markets and comment on continuing initiatives to strengthen our company. For the full-year, we achieved $511 million in top line revenue, flat with 2022. Revenue in the fourth quarter was $128.4 million, down slightly sequentially from Q3 and up 2% year-over-year. We continue to see a decline in average basket size caused by ongoing pricing pressures, offset by transaction volume growth over the prior quarter and the prior year. Wholesale revenue increased 4% quarter-over-quarter, now representing 13% of total revenue in Q4. For the full-year, wholesale revenue was 12% of total, down from 14% in 2022.
We're actively working to recover and improve our wholesale part of the business, as we've already outlined. Adjusted gross profit in the fourth quarter was $44 million, down from $50 million in the prior quarter and $47 million in Q4 of 2022. Our adjusted gross margin of 34% in the fourth quarter was down from 39% in Q3 and 37% in the prior year, a result of a deliberate inventory reduction strategy undertaken as we transition away from the Cresco transaction. Our inventory reduction was achieved through higher discounting, both through retail and wholesale channels and has a desired effect of increasing operating cash flow despite the lower margins. We continue to experience absorption accounting from underutilized facilities with 5 percentage points of gross margin impact due to the underutilization of our cultivation sites.
Increasing utilization remains a key opportunity to recapture gross margin in 2024. And while it won't materialize overnight, we're already seeing some progress. Adjusted EBITDA in Q4 was $12.5 million, contributing to the full-year total of $70 million. Adjusted EBITDA, down markedly quarter-over-quarter, nevertheless, represented a 3% increase over the full-year total in 2022. The fourth quarter decline was primarily a result of clearing through aging and excess inventory as we've discussed, temporarily depressing both gross and EBITDA margins. Concurrently, we saw a strong improvement in cash from operations in the fourth quarter with $9.4 million generated in Q4 compared to $1.8 million achieved in Q3. Prioritizing cash flow was a strategic initiative for us in 2023, achieving positive operating cash flow one quarter ahead of schedule and posting a large sequential increase in Q4.
During the fourth quarter, we did not open any additional retail stores and ended the year with 86 active locations. That figure stands at 85 today given the completion of our Utah divestiture, which we announced earlier today. We anticipate four new store openings in 2024, one in Maryland, one in New Jersey and two in Virginia to reach our maximum license caps in each of these states. During 2022 and through the second half of 2023, we announced a series of cost reduction initiatives, including the integration of the prior gLeaf acquisition, facility closures and the reduction of corporate overhead that we expect to generate a net $38 million in total annualized cost savings. As one indicator of this progress in 2023, we achieved a 24% reduction in our corporate overhead expense compared to the prior year.
We anticipate a full-year's benefit of cost savings going into 2024, offset slightly by minimal investments to support our strategic initiatives, in growing the wholesale business, investing in technology and expanding our manufacturing capabilities. On to our liquidity, we ended the year with $39.3 million in total cash. This was achieved after paying down $30.6 million of senior debt in the fourth quarter, $25 million to redeem the bulk of our 13% notes due May 2024 and $5.6 million to fully settle the convertible notes that matured in December of 2023. Capital expenditures in the quarter were $1.7 million, consistent with our CapEx guidance. For 2024, we expect a continuation of CapEx at these manageable levels in the range of $2 million to $3 million per quarter as we've already invested in the bulk of our more capital-intensive infrastructure.
In 2023, we executed on a number of measures to strengthen our balance sheet. During the year, we retired approximately $35 million of net debt, including the $30 million of senior notes in the fourth quarter and a net $5 million to settle all but one of our remaining seller notes. In 2024, so far, we began reduced leverage through the exchange of $10 million of our 6% convertible notes due 2025 to equity and anticipate a further $15 million to exchange by the middle of this year, consistent with the transaction agreement we announced in January. Today, we announced the closing of our Utah divestiture for $6.5 million in gross proceeds and we'll continue to target initiatives to improve cash flow, further de-lever the balance sheet and reduce interest expense.
I would like to underscore our key financial priorities. They remain driving improvements in gross margin, EBITDA and operating cash flow, while continuing to proactively manage our balance sheet in what remains a challenging market for the cannabis industry. In the midterm, we are targeting to build to EBITDA margins above 20% sometime during 2025. We don't expect the path to be linear, but the team remains focused on executing against that goal. 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 leave me with this. Make no mistake, we appreciate that there is a lot of work ahead of us, and we relish the opportunity to capitalize on our strength in 2024 and exit the year in a materially stronger financial position. I fully expect that this year will require persistent blocking and tackling to ensure we strengthen our foundation and position the company to achieve its potential in the years ahead. You will see us make the necessary changes to right the ship, so to speak, after an erudite 2023. I have committed to assume that this business will look very different by the end of 2024, and we are evaluating everything from our portfolio of assets, the company culture and putting in the effort to make sure we deliver.
We are committed to fostering a positive and inclusive work environment to ensure we set the strategic direction, align the organization and mobilize leadership. We're fortunate to have a great team that is committed to success and I am privileged to work alongside them. Operator, please open the line for questions.
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