Ayr Wellness Inc.
Q1 2021 Earnings Call Transcript

Published: 26 May 2021

[Operator:]

Welcome to the Ayr Wellness First Quarter 2021 Earnings Call. Joining us today are Ayr's CEO, Jonathan Sandelman; the company's CFO, Brad Asher; and the company's Co-Chief Operating Officer, Jennifer Drake. The company will discuss forward-looking matters on this call, including targets for revenues and adjusted EBITDA. This forward-looking information is subject to the assumptions and risks as described in the company's management discussion and analysis for the quarter ended March 31, 2021.

[Jonathan Sandelman:]

Thank you, and good afternoon, everyone. The first quarter was truly transformative quarter for our business. Our strategic name change at the beginning of this year serves to better reflect our mission to deliver the highest quality cannabis, the best customer experience and to be a force reckoned in our communities. We're happy to report our strong Q1 results today and even more excited for the progress anticipated for the remainder of 2021. Our revenue in the first quarter grew 74% year-over-year, and our adjusted EBITDA more than doubled. This growth was mostly organic as our acquisitions closed too late in Q1 to contribute much to this quarter, but that will change as we move through the rest of the year. In total, we closed 3 major acquisitions in Q1, beginning in February with our acquisition of Liberty Health Science, adding the fourth largest retail footprint in Florida to our portfolio. We also closed on our Arizona acquisition at the end of March, adding 3 new dispensaries and a large cultivation expansion in one of the latest adult-use markets to emerge in the West. In March, we also closed our acquisition in Ohio. And we were able to harvest our first flower in Pennsylvania called Revel, which hit the shelves in our stores earlier this month. We also opened our sixth store in the Nevada, the closest dispensary to the Las Vegas Airport, just in time for the return of tourism to the state. The results of our successful execution are beginning to show in our numbers. And substantial progress can be seen in our April monthly revenue. We told you all about the amazing record for 4/20 we had, but the entire month was incredibly strong, with total revenues nearly doubling since January. You will see this continue to build through the year as we close our New Jersey acquisition, as Florida continues to improve and our next cultivation projects come online. We have always been committed to building strong foundations for the future of our business. In 2021, as we expand in our 7 states, that investment will increasingly focus on building our brands. We are putting significant resources into elevating and evolving the Ayr Wellness brand. As part of this, we partnered with a premier branding company to build the foundation for our national branding strategy to be cultivators of wellness and creators of wonder.

[Brad Asher:]

Good afternoon, everyone. As Jon mentioned, we are proud of the substantial growth in Q1. As a reminder, Q1 included only 34 days of contribution from the Liberty acquisition and 8 days of contribution from the Arizona acquisition. Now I'll be walking through actual results of the business without any pro forma adjustments. Q1 also presented our first quarter reported under U.S. GAAP. We signaled to this change on our previous call, and I want to reiterate a few of the key differences you will see in our Q1 results and going forward. It's important to note these differences are all in line with industry norms and not unique to Ayr in any way. Warrants and biological assets are 2 of the areas that show the greatest differences between IFRS and GAAP in our industry. Under GAAP, our warrants were treated as equity as opposed to liabilities. And we no longer have the biological asset fair value requirement. Therefore, all fair value is removed from inventory.

[Jennifer Drake:]

Thanks, Brad. As Jon mentioned in his opening remarks, Ayr's business will look dramatically different throughout the remainder of 2021 than it did in the first quarter. After closing our acquisitions in Florida, Arizona and Ohio, we're well on our way to meeting many of the critical milestones that we laid out a few months ago on our year-end call when we set our 2022 targets. I want to spend our time today on this call putting more detail around that ramp-up in revenue and EBITDA because judging from the 50% discount we tried at relative to our peers, clearly, there's some uncertainty as to our ability to hit our $725 million revenue target and $300 million GAAP adjusted EBITDA target, which, as Brad mentioned, translates to $325 million of adjusted EBITDA on an IFRS basis. The first major contributors to the ramp have already been accomplished. We've closed our acquisitions in Florida and Arizona. And we've begun to ramp up in Pennsylvania in our 2 new Ayr Wellness stores and in cultivation. These 3 states, combined with the addition of a sixth dispensary in Nevada, have already contributed to the near doubling of our run rate revenue in April versus January. As Jon mentioned, this month, in the month of May, we began selling our own flower in Pennsylvania. This is very important because it will drive revenue increases in our stores and revenue increases from Pennsylvania wholesale, and it will move EBITDA margins up in the state.

[Jonathan Sandelman:]

Thanks, Jen. As discussed, we're excited to see our strategy playing out as planned and are encouraged by the strong results we were producing in April as a result of our quality execution and recent acquisitions coming online. We are focused on closing our New Jersey acquisition later this summer, and we expect to see continued progress from our existing states as we look to bring more cultivation capacity and dispensaries online in Pennsylvania and Florida. We also continue to see excellent opportunities out there for additional expansion through M&A, both to deepen our presence in our existing states where possible and to add new states to our footprint. We remain committed to finding the right assets and the right people at the right price. Having 6 of our 7 states generate over $100 million in revenue in 2022 is what we mean when we say we want to be in states that are meaningful and can move the needle. We continue to look for those opportunities, plus new opportunities to leverage sales through that strong diverse footprint. We look forward to reporting our full Q2 results later this summer, demonstrating the next step function in the growth that we've talked so much about today and to announcing even more expected milestones and opportunities as they arise. We look forward to welcoming all of you to our new Florida headquarters sometime later this year. With that, I now hand it over to the operator to open up for questions.

[Operator:]

. The first question comes from Matt McGinley with Needham.

[Matthew McGinley:]

When we strip out the noise in the gross margin rate related to acquired inventory and start-up costs, which I assume is predominantly in new states, was there any real change in the gross margin rate in Nevada and Massachusetts? And second to that, implicit in that 30% EBITDA rate you guided for in the second quarter, does that adjusted gross margin rate stay about the same as you had it in the first quarter?

[Brad Asher:]

Yes. Matt, this is Brad. So the incremental cost to acquire inventory that only relates to the acquisitions, $28 million of that is on our balance sheet and $5.8 million was flowing through the P&L. Almost all of it relates to Florida. So none of that relates to Massachusetts or Nevada. In terms of those margins, I think they've been very consistent from prior quarter. And I just want to reiterate that incremental costs are not at all related to Massachusetts or Nevada.

[Matthew McGinley:]

Great. And Brad, implicit in that 30% EBITDA rate for the second quarter, does that gross margin rates stay about the same?

[Brad Asher:]

Yes. I think you're going to see that margin in second quarter stay the same in the second half of the year. I think you're going to start to see some improvement, especially with SG&A as we get some operating leverage, EBITDA margins overall will trend up.

[Operator:]

The next question comes from Russell Stanley with Beacon Securities.

[Russell Stanley:]

Just around Florida, obviously, a huge priority. And a number of the initiatives that you have underway take some time to produce results, although you've already seen a major increase in yield. Just wondering, from a standpoint of your actual to do list, how much progress have you made? Are you 50% of the way there? 75% of the way there in terms of actually taking action on these items so far?

[Jonathan Sandelman:]

So I'll take that, Russ. Thanks for the question. In Florida, we've seen major progress. I've recently talked in various interviews that when we look at the business simply back to August, the crop failure rate was 25%. And now that rate is in line with our other cultivation site. So if you think about it, you have the cost to produce 100% and you only end up with 75% of the product. So it's a major expense that's essentially been eradicated. Next, the gram per square foot, that has increased already by 60%. We've talked about Florida. One of the issues that Liberty had, it only had flower 2 days a week in its stores. Now we have flower 4 to 5 days a week, but we're still narrow on our genetics. We only have 2 genetics in our stores today. By June and July, we should have 15, and we should have flower 7 days a week. So major progress in improving the efficiency and the yields in cultivation, which then drives the inventory in the stores, which in turn drives the revenue per store.

[Russell Stanley:]

Great. That's helpful. If I could sneak one more question in just around Massachusetts and your expansion plan underway at Milford. Given your penetration level already very high, I guess my question is around dispensaries. How many more dispensaries do you need to see that market add in order to absorb the additional capacity that you have planned?

[Jonathan Sandelman:]

So if we think about it, when our adult-use stores are operating, we won't have any product to be able to put into the wholesale market. So we need that capacity to just maintain what we have. And as the market continues to grow, today we're in 95 out of 127 stores. That's projected to grow by the end of the year to at least 135 stores. Most of the growth, as we've talked about in the past, is coming from non-vertical players who need to buy products. So we see our wholesale business growing. You saw a quarter or two ago, when we had material return to us have been locked up in the inspection process. When it was finally released, and we had product to sell, we took our recent average of $4.5 million approximately a month in wholesale to almost $6.5 million. So there's demand. We've always felt there's probably twice the demand that we're able to supply, and that's in current markets. And with the further growth in non-vertical retail stores, we see that we'll be able to supply the market without affecting the average selling price.

[Operator:]

The next question comes from Matt Bottomley with Canaccord Genuity.

[Matt Bottomley:]

Congrats on the quarter and the recent acquisition closing. I just wanted to revert back to the 2022 guidance in relation to where things are looking for next quarter on the EBITDA margin profile. So still expecting around 30%-plus margins going into Q2 here. And even on a GAAP basis, 2020 looks to be about 41%, if my math is correct. So I'm just curious if you can give us a road map of what is the large contributors to that appreciation of margin between your retail versus wholesale strategy as well as new markets like New Jersey and Arizona with respect to how they're going to play into that margin expansion?

[Jonathan Sandelman:]

Well, if you think about it, in some of our major markets today, we're not vertically integrated to the extent that our retail stores need product. And a lot of that vertical integration happens as the cultivations get completed towards the end of the year and the beginning of next year. And we all know that a vertically integrated operator has higher margins than one that has to buy third-party product. And it's just simple math. Cultivation comes in, we supply our own stores, margins go up. If we just replace the third-party product and sales were even flat, our margins would go up.

[Matt Bottomley:]

Okay. That's fair. And then the other question I had was on just looking ahead to next quarter. If you can just give a little more color on the dynamics you're expecting with the full period from Arizona. I don't expect you to quantify within the $90 million, how much does that say, but clearly, less than a week of performance in Q1 versus the full quarter in Q2. And then also just the market dynamics as it looks like in many states, obviously, I'm in Toronto here, so we're not fortunate, but it looks like many states in the U.S. are starting to open now on the back of COVID restrictions being relieved. So your anticipation of consumer behavior into Q2 and maybe Q3 on the back of states opening up versus acquisitions coming online for a full period in the next quarter.

[Jonathan Sandelman:]

So we don't have any states different than Toronto that are closed right now. So I'm not sure of the question.

[Matt Bottomley:]

Yes. So I guess I'm just trying to get an idea of how much of next quarter is going to be more organic growth within the assets themselves versus just new revenues coming online because the deal closed?

[Jonathan Sandelman:]

Well, the deals that are closed are already contributing. We've -- Brad went through that. And they will continue to contribute. And as the CapEx program finishes and more cultivation comes online, it will contribute even more. And that's what we're showing. We're showing a bridge, right? We're showing you the first quarter. We're talking about April. We're talking about the second quarter. And what we've always talked about is the first half of the year is an investment period that paves off in the second half fourth quarter of next year and into 2022.

[Operator:]

The next question comes from Scott Fortune with ROTH Capital Partners.

[Scott Fortune:]

Real quick in Nevada, you'd added 6 stores there. I just want to get a sense for tracking a similar, as we see the Nevada market really open up the tourism, and how you're producing 20 million-plus stores annually that you have in that state. How's the added efficiencies and capacity coming along? Or is that another market you look to have potential production expansion?

[Jonathan Sandelman:]

No, we're adding manufacturing capability -- excuse me. We're adding manufacturing capabilities, as we've said, in Las Vegas. The good news is when we look at our quarter and the growth that Nevada had in a difficult tourist market, and while we're not dependent on tourists, it does help when the tourists come back and the hotels and casinos start to rehire their people. We are focused on the local markets. We've always been focused on the local market, but employment has been -- unemployment rate in that state has been extremely high. And so we think we're right at the inflection point of seeing potentially very strong growth here.

[Scott Fortune:]

Okay. No, I appreciate that. And then really, any updates on Boston, dispensary timings, what's going on in Massachusetts? And just maybe a little bit more color on the national branding strategy that you're rolling out, kind of narrowing down some brands? Is this existing brands that you have like Origyn, like you mentioned, putting in place in the new states? Kind of step us through a little bit more color on that strategy.

[Jonathan Sandelman:]

So we have approximately 500 SKUs in the company. The original branded portfolio that we created, plus through acquisitions, we pick up other branded portfolios. And what I've asked my team and the branding company to do and our operators is to take a more focused approach on a single portfolio that we will have in every state that we're in. We will have that both in our retail and in our wholesale business. So we'll be -- those brands will be in our stores and in our competitors' stores. And by doing that, we consistently brand and market the same concentrated portfolio. We will, in effect, create the first true national brand. And you've seen how well we've done in brands. In Nevada, where we have 12% of the overall market, it shows we have a strong brand. The highly edible brand in Nevada is a strong brand. The Sira brand, according to BDS, is the #2 brand in Massachusetts. So we have this extensive portfolio. We narrow it, we concentrate it, we market it, we brand it. We sell it through our retail. We sell it to the wholesale market. And as our footprint continues to expand, these names in this portfolio will be nationally-branded products.

[Scott Fortune:]

Got it. And then real quick, any updates on the Boston kind of what's moving in Massachusetts timing from that standpoint?

[Jonathan Sandelman:]

I have no new information to share. But I think what we've said in the past is what we know to be true.

[Operator:]

The next question comes from Vivien Azer with Cowen.

[Vivien Azer:]

I wanted to follow up on your comment that you're moving your HQ to Florida to really solidify your commitment to that market. I was wondering whether you could comment on any potential cost savings due to the relocation. Presumably, you're taking advantage of, perhaps, more attractive relative real estate costs?

[Jonathan Sandelman:]

So, Vivien, real estate is much cheaper. Our -- what we're going to pay per square foot is about 1/3 of what we have been paying in New York City. But I really think that the strategy is more than just the efficiencies for the cost savings on the commercial real estate. It's always been my belief that the Liberty asset by itself will be worth more in the future than the current value of our stock today. And we will expand as rapidly as we can. We don't want to get down in front of the cultivation because that's been the mistake they've made in the past. But because of the rapid improvement in our cultivation issues, in fact, that I spoke about recently, it will give us the ability to expand. And while we have a goal out there of 42, my personal goal is to be more aggressive than that. So I think the collective management at Ayr, understanding the importance of Florida, has made this decision that if we focus intensely on this state, the upside is just tremendous.

[Operator:]

The next question comes from Andrew Semple with Echelon Capital Markets.

[Andrew Semple:]

Congrats on the first quarter results. First question here, just trying to understand the magnitude of the first harvest completed in Pennsylvania during the second quarter. Would that be earmarked entirely for your own dispensaries? Or would you expect to also recognize some of your first wholesale revenues in that market in the second quarter?

[Jonathan Sandelman:]

Brad, correct me if I'm wrong, but -- by having the site harvest we'll realize, we will both be in the retail and wholesale market. And as you must know, the wholesale market is still very constrained, and it's a very good wholesale market. So you'll start to see wholesale revenues there. Brad, do you have any details on that, that you want to share or...

[Brad Asher:]

Yes. No, I mean, that's exactly right. And as a reminder, we have 2 stores open at this time. So we are going to feed our stores with flower, but we're absolutely going to have from that harvest enough to start producing a wholesale business in that state.

[Andrew Semple:]

Great. That's helpful. I wanted to ask a question on one of the comments in the press release about step function growth in Q2 and Q3. I think the wording was -- especially in Q4. Just wanted to clarify on that last point, where you called out the Q4 growth. Are you maybe suggesting there that Q4, we might see an acceleration of revenue sequentially in Q4 relative to the growth rates we see in Q2 or Q3? I just want to make sure we're not misinterpreting that statement.

[Jennifer Drake:]

I think it's a matter of -- in Q4, we're going to see a number of cultivation facilities come online, and so that's really when the run rate will start to reach that peak that feeds into the $300 million of GAAP adjusted EBITDA guidance for 2022.

[Andrew Semple:]

Okay. Understood. And then maybe just a final question here on Ohio. They announced a number of new dispensary licenses to be issued in that state. Just wondering whether this announcement would adjust your strategic priorities at all, whether you'd want to move maybe a little bit quicker on bringing wholesale capacity to that market with additional dispensaries coming online?

[Jonathan Sandelman:]

I think our strategy in Ohio is to move as fast as we can. And we are aware of those store opening, but it is still a constrained market without those stores. There, we're a cultivator on a manufacturer at this point. We hope to be a retailer in the future. So I don't think that changes anything because our plan originally was to build as fast as we could. So we're just going to stay on that plan.

[Operator:]

The next question comes from Jason Zandberg with PI Financial. It seems that Jason Zandberg has dropped off. . The next question comes from Greg Gibas with Northland Securities.

[Greg Gibas:]

I guess, first, how should we think about organic revenue growth in the quarter? And then second, as we layer in the new acquisitions this year, the partial quarters in Q1 for Arizona and Florida and then Ohio and New Jersey to come in July to your existing business, how I guess would you expect gross margins to trend as a result of those?

[Jonathan Sandelman:]

Brad, do you want to take it? I think we've answered this question before. But Brad, do you want to respond to that?

[Brad Asher:]

Yes. So we do have growth from our existing states quarter-over-quarter. I'd say it's in the 5% to 10% range. The balance of that is coming from these assets coming online. And that's really what you're going to see in terms of Q2 with that 55% quarter-over-quarter growth in sales. It's really those assets coming online. In terms of margin, it's back to our original point about vertical integration, right? So we're, in these states, pre-vertical integration where we're just in the retail business. And margins are lower than -- basically, we're also acquiring customers with lower margins. And once we have vertical integration, I think you're going to see a substantial lift roughly 20% in margins.

[Jennifer Drake:]

And Greg, the vertical integration in a market like Pennsylvania or New Jersey should be the same. And ironically, also in Florida. It allows you to get more -- both better margins and more revenue because the more when you're going to constrain the market like Pennsylvania or like New Jersey will be, people want to go where they know when they go to a store, they'll be able to buy what they want. For different reasons, the same dynamics in Florida. So you're having these supply-constrained market dynamics play out where when we have our cultivation and production that can feed our own stores, it drives both the top line and the EBITDA line.

[Operator:]

The next question comes from Jason Zandberg with PI Financial.

[Jason Zandberg:]

I just wanted to ask, I think it was asked by Matt earlier. I'm not sure if there's any clarification on the answer, though. Just in terms of now with a reopening economy, have you seen any differences in consumer behavior in terms of basket size, in terms of number of customers on a daily basis coming through the stores. Just any color you could provide on differences in consumer behavior would be helpful.

[Jennifer Drake:]

Yes, when we -- go ahead, Jon. Sorry.

[Jonathan Sandelman:]

Yes. I wouldn't say that with the -- necessarily with the economy opening, we're seeing the kind of experience that retailers -- conventional retailers are seeing, right, people rushing in and start shopping in malls again. But what we are seeing, and we talked about Nevada, with the unemployment rate falling, disposable income is going up. We expect that that will impact revenue. So it's not -- I don't think we're seeing the opening of the economy trade because business has been strong all through COVID once our stores opened up. And so I don't see that as a driving factor at this point. But obviously, if unemployment rates continue to go down, and people are feeling more secure, they tend to spend more money. So I would agree with that.

[Jason Zandberg:]

Okay. No, that's great. And if I could just clarify, in terms of peak production or cultivation yields in Florida. When do you expect to be at that peak? Is that a Q2, Q3 or Q4 sort of target?

[Jonathan Sandelman:]

So I can't tell you exactly when the peak will happen, but we're seeing, as I mentioned earlier, a 60% increase in efficiency and yield. And I think we still have a lot of work that we can do to get those yields more in line with where we average in our other states. I think by Q4, they'll be much higher than where they are today. But I think it's a very smooth function. I think that each harvest will get better and better. And as we add more genetics, then I also think the yields will go up and the efficiency will go up. If you're dependent on only 2 strains, it's less likely that you'll accelerate that as opposed to when you're adding 13 additional strains. So I think it's going to be a very smooth function to a more efficient number that's more in line of what our numbers are in our other cultivation sites, and they'll go harvest-by-harvest, improvement-by-improvement.

[Operator:]

The next question comes from Howard Penney with Hedgeye.

[Howard Penney:]

The retail sales increase of 24% in Nevada, would that be close to a same-store sales number? Or do you have that? Or would you be willing to talk about that?

[Jonathan Sandelman:]

Brad?

[Brad Asher:]

Yes. Can you repeat the question, specifically around...

[Howard Penney:]

I was just trying to look at a metric of same-store sales, and you said retail sales are up 24% in Nevada year-over-year. I was wondering if that's equal to, like, a same-store sales number?

[Brad Asher:]

Yes, I'd say 80% of that is. We have an additional store online now, but it's still ramping. So it really is organic growth in those stores.

[Operator:]

We currently have no more questioners in the phone lines. And this concludes the question-and-answer session and also, today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.