TPCO Holding Corp.
Q1 2022 Earnings Call Transcript

Published: 17 May 2022

[Operator:]

Good morning, everyone. Welcome to The Parent Company’s First Quarter 2022 Conference Call for the three-month period ending March 31, 2022. Listeners are reminded that certain matters discussed in today’s conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to risks and uncertainties relating to The Parent Company’s future financial or business performance. Any such forward-looking information is based on certain assumption and is subject to risks and uncertainties that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information, including the risk factors detailed in The Parent Company’s continuous disclosure filings that can be accessed via the U.S. Securities and Exchange Commission website at www.sec.gov or SEDAR at www.sedar.com. Forward-looking information provided in this call speaks only as of the date of this call and is based on the plans, beliefs, estimates, projections, expectations, opinions, and assumption of management as of today’s date. There can be no assurance that forward-looking information will provide to be accurate, and you should not place undue reliance on forward-looking information. The Parent Company undertakes no obligation to update such forward-looking information, whether as a result of new information, future events, or otherwise, except as expressly required by applicable law. In addition, during the course of this call, there may also be references to certain non-GAAP financial measures, including references to adjusted EBITDA, which do not have any standard meeting under GAAP, and therefore, may not be comparable to similar measures presented by the companies. For more information about both forward-looking information and non-GAAP financial measures, including a reconciliation of adjusted EBITDA to the most directly comparable GAAP measure, please refer to the Company’s quarterly report on Form 10-Q, including management’s discussion and analysis, available on the SEC’s website and SEDAR. I would now like to remind everyone that this call is being recorded today, Tuesday, May 17, 2022. I would now like to introduce Mr. Troy Datcher, Chief Executive Officer of The Parent Company. Please go ahead, Mr. Datcher.

[Troy Datcher:]

Thank you. Thanks, everyone for joining us. During today's call, I will share an overview of our plans for 2022 and how the changes we are implementing over the course of the coming months will position us to better utilize our assets and maximize our footprint to emerge as a leader in California and our stated goal to be a world-class brand builder in our industry. Then I’ll turn the call over to Chief Financial Officer, Mike Batesole, to review our Q1 2022 financial results in more detail before opening the line for questions. We started this year as a fundamentally different company than who we were in 2021. A year-ago, only 24% of our revenue was derived from our higher margin omnichannel retail platform with the remainder coming from our higher volume, but low margin, bulk wholesale business. Today, because of our focus we put against our strategic initiatives, our omnichannel retail revenue grew 97% year-over-year to represent 57% of our overall revenue in the first quarter. This helped to expand our gross margins to 25% compared to an average of 12% in 2021. This was a dramatic shift in only 12 months, and we are incredibly pleased with the progress we made to date on this execution of this part of our strategic plan. To further support improvement and our profitability, we have identified several strategic long-term initiatives that we are in the process of implementing across our organization. Our primary focus is to continue to shift that revenue mix to be heavily weighted towards our omnichannel retail platform, which includes retail, pickup, delivery and online sales. While these efforts may have an impact on our topline revenue, this is an important initiative and we have set a target for our omnichannel retail revenue to account for at least two-thirds of our overall revenue by the end of fiscal 2022. As a result of our focus to grow our omnichannel retail revenue and our optimization and cost reduction initiatives, we are targeting gross margins in the excess of 30%, which we expect to achieve at the end of fiscal year 2022. And parallel with these efforts, we will continue to feature our first-party brands in our ecosystem to not only improve profitability, but also increase brand awareness and ultimately create long-term customer loyalty. At the end of Q1 2022, approximately 24% of the products in our retail stores were from first-party brands, and we've set a target to grow this number to more than 30% by the end of fiscal 2022. Additionally, we have undertaken several cost saving initiatives, including the transition of our wholesale distribution responsibilities to a third-party specialist. We are also executing plans to optimize our delivery depot operations and implementing a reduction of third-party brand distribution activities. This is in favor of exclusively own brands, revenue reduction of payroll expenses, while also reducing our exposure to low margin sales, our products by optimizing our in-store product menus to focus on better performing product categories. With the implementation of these measures, we expect to reduce our full-year 2022 operating expenses by approximately $30 million, roughly 20% lower than in 2021. As we mentioned during our year-end call, with the implementation of these measures and subject to any opportunistic partnership acquisition transactions, we expect to maintain a minimum cash balance of approximately $100 million at the end of 2022. This is sufficient to sustain our business for a minimum of three years with a goal to become cash flow positive in fiscal year 2023. I have just outlined how we plan to preserve our strong balance sheet and build a plan to long-term profitability. But the key to the successful implementation of this goal will be the management team, which we've assembled to lead this company. I am confident that we assembled the right leaders with diversified industry experience to help us build a strong and healthy business. Throughout the remainder of the year, we will focus on building our brands by leveraging retail insights, building on our relationship with Roc Nation and JAY-Z, as well as executing on opportunities for out-of-state partnerships. And for the latter, keep in mind, finding the right long-term partner that shares our core values is a priority for us and will be a key consideration when executing any agreement. One of the key differentiators that sets us apart is our consumer-first approach, which we believe is a strong competitive advantage in a challenging operating environment. Now more than ever, our consumers have wide access to many options to drive loyalty with customers, we will deliver retail experiences that remove frictions and frustrations by meeting them where they are and how they like to shop with exciting products and experiences informed by their voice. We also made accessing our products more convenient with our expanded retail network of stores, distribution depots, retail locations, and mobile ordering app, giving us approximately 80% coverage of the state, making the shopping with us easier than ever before. I firmly believe that by delivering convenience and reliability while harnessing our data to develop innovative products will be successful in creating enduring satisfied customer relationships and fostering loyalty to expand our omnichannel retail business and become the top choice for consumers. I look forward to speaking with you again on the progress as we continue to execute over the coming months and quarters. At this point, I'd like to turn the call over to Mike, who'll discuss the financial highlights of the quarter. Mike?

[Mike Batesole:]

Thanks, Troy, and good morning, everyone. As a reminder, the results I’ll be going over today can be found in our financial statements and MD&A contained in our quarterly report, Form 10-Q. All figures are in U.S. dollars, and it should be noted that we are U.S. registrants, and as such our financial statements were prepared on a U.S. GAAP basis. As a note before I begin, our financial results for the quarter ended March 31, 2021 covered 14 fewer days than our financial results for the quarter ended March 31, 2022, due to the fact that our qualifying transaction did not occur until January 15, 2021. Accordingly, our results of operations are not fully comparable between these two periods. Q1 2022 net sales totaled $33.2 million compared with $39.9 million in Q1 2021. The quality of our revenue profile increased substantially year-over-year as our omnichannel retail revenue grew 97% year-over-year to $19.1 million, or 57% of sales compared to $9.7 million or 24% of total sales in Q1 2021. Wholesale revenue was $14.1 million or 43% of sales in Q1 2022 compared with $30.2 million or 76% of sales in Q1 2021. The wholesale percentage total revenue decrease was primarily due to the wholesale market pricing challenges and our shift to increase higher margin omnichannel retail revenue. Gross profit was $8.2 million or 25% of sales, an increase of 16% compared to $7 million or 18% of sales in Q1 2021. With continued expansion of our omnichannel retail operations, we expect to see further improvements in gross profit and gross margin as our business shifts focus towards higher margin activities and product categories. Total operating expenses for Q1 2022 were

[Operator:]

Yes. Thank you. [Operator Instructions] And we will go ahead and take our first question from Bobby Burleson with Canaccord. Bobby, please go ahead.

[Robert Burleson:]

Hey, good morning. So just curious with the potential repeal cultivation tax, what that might do to your $100 million cash balance by the exit of 2022, how much exposure to that you might have?

[Troy Datcher:]

Mike, would you like to take that?

[Mike Batesole:]

Sure. Well, we're currently evaluating the changes in the rules and making sure that we optimize our outcome. At this point in time, it’s unclear how favorable that tax will be. It's definitely not going to be detrimental when they waive that tax. But at this point in time, we haven't quantified the impact on the business.

[Robert Burleson:]

Okay. And then just looking at the pricing environments in California, what did you guys have been seeing in terms of wholesale pricing trends? Things stabilized, what kind of – directionally, how do you see things playing out over the next quarter or two?

[Troy Datcher:]

I'll start Mike. We see short-term as more of the same Bobby. We’re not planning up for any major market corrections at all. We're paying close attention to pricing in the competitive landscape. But we don't expect that there'll be significant bounce back in pricing based on commoditization situation in California and we're preparing for that. The great news for us is we have a wide variety of brands that scale from value brands up to luxury. So it gives us an opportunity to really pivot our portfolio and focus where values change. We have an offering to meet consumers where the needs are.

[Robert Burleson:]

Okay. Great. And maybe on that – that's a nice segue into my last question is just price sensitivity for consumers these days seems to be a little heightened with inflation. And curious whether or not kind of what you're seeing on your retail distribution end in terms of consumer price sensitivity. How is that affecting things in the register for you guys?

[Troy Datcher:]

Yes. What we've tried to work with, Bobby, is a consistent consumer experience and that allows us to drive a more sticky engagement with the consumer, of course, price and value is always top of mind. And so we are making sure that we pay attention closely to those things. And with our robust data and analytics, we actually can tell exactly how those macro trends are impacting our business. So the good news is we have visibility to those challenges. We're also working on creating a loyalty platform that spans across all of our portfolio. Today, we have them across Coastal, Caliva and the other acquisitions we've made over the course of the year, we’re bringing those under one consistent umbrella, will be a key part of the value equation that we deliver for consumers. So part of that is making sure that we have the right competitive loyalty program in place to continue to bring people into our ecosystem – whether it's first-party products or third-party products that they love.

[Robert Burleson:]

Thank you.

[Troy Datcher:]

Thank you.

[Operator:]

[Operator Instructions] We'll go ahead and take our next question from Eric Des Lauriers with Craig-Hallum Capital Group.

[Eric Des Lauriers:]

Thank you for taking my questions. So significant retail M&A has kind of always been part of The Parent Company's outlook, hasn't always materialized, now it is part of the goal to sort of get to that $100 million cash level exiting 2022. Can you talk about what you're seeing in the M&A pipeline? Maybe just kind of expand on how it's different from what you saw in 2021 and maybe what gives you confidence that you'll be able to affect some M&A to get you to that cash burn? Thanks.

[Troy Datcher:]

So why don't I start Mike and please feel free to jump in and provide some additional perspective. First of all, Eric, thanks for the question. We firmly believe that we have the right footprint in California today. We're satisfied with the acquisition we made over the course of the year. We are working to optimize those investments. However, as we've always stated, we are going to remain opportunistic when offers come our way that fit our criteria for first Tier 1 locations that we have as a part of our roadmap. I will tell you that what we're seeing differently today is, is that obviously there's value in the marketplace as there's lack of access to capital. We think that trend will continue. We think that 2023 will be a really robust year for acquisitions, and it'll be favorable for buyers who have cash, which is why we prioritize, protecting our balance sheet in the short-term, so that we can be in position to take advantage of the marketplace over the course of the end of this year, but really focused on 2023. Again, we’ll remain open to partnership opportunities as they come our way. We're evaluating them every day, every week, and staying close to all the developments in the marketplace. The good news is we have cash over the balance sheet today. If we wanted to make an acquisition, we certainly have the room to do that, but we are being patient, being judicious in the work that we're doing and making sure that it meets our criteria and that criteria is pretty strict.

[Eric Des Lauriers:]

Okay. Great. And I guess if I could just to try to parse out some of your thinking a bit more. On one hand, you have a strict criteria, you're really only looking for Tier 1 retail. On the other hand, you have a significant cash burn that you need to, that's obviously a focus here on preserving the balance sheet as you've mentioned. So how should we think about that as you kind of enter the second half of the year here? How should we think about the sort of importance of those two things relative to each other? And should we think of really no M&A, if it's going to be Tier 2 or lower or is this like a real focus to really expand this D2C channel right now? Thank you.

[Troy Datcher:]

Yes. So I want to make sure I answer your question and so correct me if I doubt here. But I'll tell you that we are – again, our priority is to protect our balance sheet and we have the organization really focused on the cost savings measures that we're implementing to do exactly that. We are keeping our eye towards other opportunities. We do have some markets in which we would love to add to our portfolio long-term. But we're absolutely satisfied with the current footprint we have today. We think there's a lot of upsides in terms of margin expansion and also execution to get a better return for those assets we have on hand. So the first priority is the balance sheet in the short-term. And then second, we will continue to take a look at the other opportunities, but in order, it is protecting the balance sheet executing against their plan to preserve cash in the short-term, while keeping an eye towards opportunities that will help us expand our footprint and become that preferred market leader in California that we all aspire to be.

[Eric Des Lauriers:]

Okay. Great. And then maybe just a quick clarification here. So do you – like understand that your $100 million cash by the end of the year, and your cash flow positive in 2023, that does come with that sort of disclaimer of assuming there's some or I guess, subject to some transactions and partnerships and whatnot. So just to sort of be clear here, do you think that you can get to that $100 million cash by the end of the year and/or cash flow positive in 2023 based on the D2C facilities that you have now?

[Troy Datcher:]

We do. We are always evaluating our portfolio. We are evaluating the capabilities that we own as an organization and whether or not we are the best partner to execute against those capabilities. So we're constantly evaluating that. But all led under a very clear [indiscernible] strategy to be brand builders in this industry. And so we're looking through that lens to evaluate what capabilities are ours and ones that we need to own and be great at, and once which we'll find third-party partners to execute against the plan. And so we are very comfortable with the plan that we have in place. As you probably saw back in January, we actually had our Board of Directors and key executive side of lockup for the next 12 months because they've seen the plan and buy into the execution of the plan that we put in place to preserve the balance sheet, put us in great position for a really great 2023s, which will, as you mention, include getting to cash flow positive by the end of the year.

[Eric Des Lauriers:]

Okay. Great. Appreciate that. And then just one last for me, if I can. Could you just expand a bit more on the cost savings initiatives that you're looking to implement this year? Maybe just help us understand where those could be coming from? How we should expect that to flow through the model? Any kind of color there would be great. Thank you.

[Troy Datcher:]

We have shared [indiscernible]. Go ahead, Mike.

[Mike Batesole:]

No, go ahead. Go ahead, Troy.

[Troy Datcher:]

No. I'll let you, Mike, I've been doing all the talking, so you go ahead.

[Mike Batesole:]

The cost savings are going to come from a couple of major categories. We're not going to go into details at this point in time, but we're going to be looking to optimize the business and make sure that every one of our channels and locations are achieving the best profitability. So we're confining some of our standalone delivery into our retail to leverage those operating expenses. And we're growing across the business and optimize every one of the areas all the way from cultivation to retail.

[Troy Datcher:]

So the three things we've talked about publicly, Eric is, one, we are working with a potential third-party partner to outsource our wholesale distribution. The second thing that we've talked about, which Mike just mentioned is optimizing our delivery depots to make sure that we get to maximum profitability out of those depots. And the third is, we are taking a look at our people resource needs and there'll be a really big emphasis on payroll savings over the course of the year. So those are the three big buckets, more to come. But all the decisions will be led by our strategic choices are based on, as I mentioned earlier, capabilities that are required for us to be the best brand builders in this industry.

[Eric Des Lauriers:]

Thank you.

[Troy Datcher:]

Thank you.

[Operator:]

All right. It appears there are no further questions at this time. Mr. Datcher, I would like to turn the conference back to you for any additional or closing remarks.

[Troy Datcher:]

Thank you, operator. I appreciate everyone joining us this morning. A big thanks to the employees at The Parent Company, for all your efforts over the previous quarter and quarters to come. During today's call, we shared more details around our 2022 objectives, and importantly, shared an overview of our plans for 2022 and how those changes we're implementing over the course of the coming months will position us to be a better leader in California. Our stated objective is to be a world-class brand builder in our industry, and that remains. We look forward to sharing our plans and results during future quarters. We appreciate the time today. Thank you.

[Operator:]

And this concludes today’s call. Thank you all for your participation. You may now disconnect.