MedMen Enterprises Inc.
Q1 2021 Earnings Call Transcript

Published: 7 Dec 2020

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the MedMen First Quarter Fiscal Year 2021 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. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Zeeshan Hyder, Chief Financial Officer. Thank you. Please go ahead.

[Zeeshan Hyder:]

Thank you. Good afternoon, and welcome everyone. Today, I am joined by our CEO, Tom Lynch; and COO, Tim Bossidy. On today’s call, management will provide prepared remarks and then we will open the call to your questions.

[Tom Lynch:]

Thank you everyone for joining us this afternoon. We hope everyone is staying safe and healthy during these unprecedented times. On the call today we’ll review our first quarter, provide an update on the company’s turnaround progress, including recent operational initiatives and then discuss our financial performance for the first quarter. From a macro perspective, this past election season, saw still more jurisdictions during the growing chorus of states that have legalized adult use of medical cannabis. Additionally, about 67% of the country, a bipartisan majority, now support legalization and we saw the historic passage of the more act in the house representatives just last week. We’re optimistic that 2021 will continue to bring good news for the cannabis industry and we’ll continue to work towards a world where cannabis is legal and regulated.

[Tim Bossidy:]

Thank you, Tom. First, I like Tom and incredibly excited about the progress we continue to make here at MedMen. Our first quarter results are a testament to the tireless work put in by each team here. We are building a foundation for sustainable growth and continue to execute on the turnaround plan. As Tom mentioned, our focus is on driving retail profitability. We do not want this to be interpreted as the only place he focus operationally. We have the same laser focus across the business. But improving and removing complexity from our supply chain and our cultivation facilities, it shows up in our primary KPI, retail cash flow. Generating significant cash flow from our retail footprint and then expanding our footprint in disciplined manner will not only limit the financings and dilution required to cover our corporate overhead, but will begin to generate capital to invest in new store openings in addition to marketing efforts. Retail cash flow will be what spin is a flywheel and accelerates the growth of the MedMen brand. With respect to retail revenue, there are a number of initiatives we put into place over the past several months, which were drivers of some of the revenue growth we saw this quarter. As mentioned last quarter, we’ve made significant changes to how we think about marketing to our customers and we continue to focus on the high ROI customer connection. Over the past several months, we have been extremely disciplined on allocation of budget to marketing, while we redefined our assortment and learned about our change customer base. We continue to learn and as we do, we will grow our budget in a targeted manner. As we mentioned last call, MedMen have shied away from third-party listing services that represent a jumping off point for millions of cannabis consumers and patients. This past quarter, we successfully integrated a number of these services into our POS systems and have successfully boosted awareness with local customers. Return on this spent and these integration efforts are starting to appear. Our local customer base has also benefited from the changes we’ve made with respect to our curation and buying process. Our emphasis is on having the best product and improving availability of high earnings piece for our customers, which in turn is boosted in sale conversion. With respect to one of our key medical markets, Florida, we are shifting our focus to educating physicians on how our products are the safest and highest quality to recommend to their patients. That, plus our increasing cultivation yield and higher flower quality has resulted in an average revenue per box of $3 million to $4 million, representing continuing double-digit growth rates month-over-month.

[Zeeshan Hyder:]

Thank you, Tim. As a reminder, as of June 28, 2020, the company no longer met the qualification of the foreign private issuer as a result of more than 50% of the company’s outstanding voting shares being held by residents of the U.S. We are now considered a U.S. domestic issuer under the rules of the SEC. As such our financial statements for our first quarter fiscal 2021 just as they were last quarter or prepared in accordance with U.S. GAAP. Let’s jump into the financial. Consistent with prior quarters all the figures on today’s call are in U.S. dollars. In addition, I’ll refer to our topline performance in terms of system-wide revenue, as we believe that is the best representation of our economic progress. You can find the further information on these financial measures in MD&A for the first quarter. At a high level, this quarter is the best one we’ve had in terms of companywide in retail profitability and we are excited to share detail. System-wide revenue for our fiscal first quarter was $35.6 million, up 31% from $27.4 million from the previous quarter. Gross profit for the quarter was $16.1 million, leading to a gross margin of 47%, a 7-point increase over gross margin in the previous quarter. We continue to right-size our cost structure, corporate and at our storage facility. General and administrative expenses, which totaled $31.7 million, declined by 41% from the same period last year and 21% from the previous quarter. The improvement in G&A expenses was primarily driven by significant reduction in corporate-related expenses, including payroll, professional fees and deal cost. Our first quarter adjusted corporate SG&A totaled approximately $10 million, a 66% decrease from the same period last year, when we were at $30 million in quarterly corporate SG&A spend. Even compared to the previous quarter, we saw a 29% decrease. While there are other additional optimization opportunities, we believe our corporate costs, which now sit at approximately $41 million on an annualized basis are the appropriate levels for both managing our existing asset base and supporting the growth we expect over the next 12 months to 18 months. Turning to profitability, we were able to cut our overall adjusted EBITDA loss in half this quarter, coming in at $11.7 million, compared to the previous quarter’s loss of $23.3 million. In the same period last year, our adjusted EBITDA loss was $32.4 million. As revenue continues to rebound from the early days of COVID-19 and as we move our cultivation and production partnership discussions of DHS and Mustang along, we believe there’s a clear path to achieving breakeven even, especially considering the retail profitability we were able to achieve this past quarter, which I’ll get into shortly. Overall, net loss and comprehensive loss attributable to shareholders of MedMen was $21.9 million or $0.06 per share, compared to $33.1 million or $0.15 per share in the previous year. Let’s now take a deeper look at our retail business. Retail revenue for the first quarter totaled $35.3 million, up to 29% sequentially. This increase in revenue was driven by our California footprint, which was up 34% this quarter over the previous quarter. Our flagship stores, such as LAX, Beverly Hills and West Hollywood were up 56%, 39% and 31%, respectively, during the quarter. Several factors contributed to the sequential increase in California. First, the lifting of shelter-in-place orders earlier this year resulted in increased store traffic into our store. Second, in the last quarter, we temporarily closed most of our California stores due to social unrest and rioting in May, which had a sizable impact on revenue. And third, our product assortment and quality has vastly improved over the past six months, which has been well received by the customer. It’s important to know that for this quarter, we’re only recognizing partial revenue for our Evanston retail store, because of our agreement divest the license to the third-party. Our pre-announced revenue number for this quarter of $37 million included a full quarter of Evanston revenue. Moving down to retail gross margin. We recorded our best quarter ever, 54% nationally and 56% in California. By consolidating our product portfolio we develop extremely strong relationships with our key vendors in each of our markets, on pricing and payment terms that are very favorable to MedMen. Even with all the progress over the past six months, there’s still significant opportunity to expand margin. In Illinois, we are still hovering around mid-40s, as that market normalizes we expect the retail gross margins north of 50%. The same holds true in Nevada, where margins still have room for improvement and as our Mustang partnership discussions move along, we anticipate our supply deals with the potential partner will allow us to move these margins up. In addition to retail gross margin we have made significant improvement in overall retail EBITDA as well. Our adjusted retail EB ITDA jumps to positive 19% this quarter from breakeven in the previous quarter, primarily driven by further payroll optimization and reductions in our store operating costs, such as payment processing. Even when factoring in federal, state and local taxes we were cash flow positive for the quarter across the retail for the first time in the company’s history. We are thrilled with the progress in our retail footprint and believe that as topline normalizes and our gross margins continue to pick up, we’ll put ourselves in a great position to cover our corporate costs and growth initiative since the capital we’re producing across our stores. Moving on to the balance sheet, we ended the quarter with $10 million in cash and cash equivalent. There were a number of capital raising transactions we completed subsequent to the quarter end, including additional capital coming in under our unsecured convertible facility, as well as an upsize in our senior secured term loan. We continue to work closely with our capital partners to continue funding the business as we enter the homestretch of our turnaround plan. A quick note on our cap table as well. Given our multi-class structure, as of December 3rd, we had approximately 500.3 million subordinate voting shares and an additional 147.8 redeemable shares, which are convertible into subordinate voting shares on a one-to-one basis. To wrap up the prepared remarks, I along with the rest of the team are very optimistic and excited about what the rest of fiscal 2021 looks like for MedMen. We’ve made tremendous progress over the past year and while there’s still more work to do with a revamped team and board, a renewed focus on our retail business and additional capital, we are well-positioned to reach profitability this year and return to growth as a leader in cannabis retail within the U.S. We will now open up the call to your question.

[Operator:]

And your first question comes from a line of Vivien Azer from Cowen. Your line is open.

[Vivien Azer:]

Hi. Good evening. Thanks for the question. So first one, Zeeshan just a housekeeping item, given that your reporting cycle is happening so late. Can you give us a more real time update on what your cash balance looks like?

[Zeeshan Hyder:]

Hey, Vivian. So in terms of what we announced post the quarter end, so we announced, as of the end of September, we had roughly $10 million or so on our balance sheet. Subsequent to the quarter end, we announced a couple of different financings. One was the increase under the Stable Road Hankey facility, which was around $7.7 million and then we drew down additional proceeds under our unsecured convertible facility of another a couple million or so. So that’s kind of what we announced post quarter end and then we’re also kind of working on new financings right now with our existing capital partners to bring additional funds in.

[Vivien Azer:]

Okay. That’s helpful. And then my real question, as you guys kind of think about on the operating landscape over the next few months. I mean, just today, I guess, stay-at-home orders went back, in fact, in Los Angeles and some other jurisdictions in California. So how are you guys thinking about the impact on consumer demand? Thanks.

[Tom Lynch:]

Sure. Tim, why don’t you take that? This is Tom.

[Tim Bossidy:]

Absolutely. So I don’t think there’s any getting around the fact that reducing storage capacity in California from 50% to 20% will have some impact on our in-store sales. But I think the positive thing to take out of this is that, because we’ve built a foundation, where we think we have an unbelievably good delivery operation, especially now with the addition of scheduled delivery and with the success that we’ve seen from curbside pickup that we think we’ll be able to weather through this income out in pretty good shape. But there will be -- there will absolutely be a store impacted from capacity in the stores. But again, I think, we’re really well-positioned with delivery and curbside pickup.

[Vivien Azer:]

Understand. Thanks very much.

[Operator:]

Your next question comes from a line of Scott Fortune from ROTH Capital Partners. Your line is open.

[Scott Fortune:]

Good afternoon and thanks for taking the question. Tim, with your cash flow positions and you want to grow for next year 2021? Where are you prioritizing resources and capital allocations in 2021? You have two stores in Massachusetts, four in Florida, potentially a second one in Illinois. Kind of just stepped up to the near-term plan and timeline of that allocation -- capital allocation of providing growth going forward here?

[Tom Lynch:]

Yeah. Tim, why don’t you take to those markets again.

[Tim Bossidy:]

Yeah. Absolutely. So, as discussed, I think, our highest ROI dollars are going to be allocated to expanding our canopy within Florida, just given how attractive our store footprint is already in that market and how many stores are ready to go. So that’s going to be our top priority in terms of allocation of CapEx dollars and then after that we’ve got minimal CapEx dollars to go again to open up our Emeryville location, which we’re incredibly excited about. And then as far as the two San Francisco stores and the two Massachusetts stores, part of that will be timed in parallel with the regulatory pieces of getting those up and running. But those are also incredibly high ROI opportunities on our list. But they’ll come right after allocating dollars to the Florida canopy expansion.

[Scott Fortune:]

Okay. And then real quick, what’s the follow up on kind of the asset sales, the one in Illinois. You took opportunities there, Arizona and the other states that you’re looking at? And with the favorable M&A market that’s starting to occur here with the new legal rate rest of states coming on board and additional thoughts on your assets and positioning for potential sales there?

[Tom Lynch:]

Go ahead, Tim.

[Tim Bossidy:]

So, I mean, I think, we’ll -- the way that we look at our portfolio right now is that we’re going to continue to focus on what we view is our highest value markets where our brand resonates the absolute most for further expansion and we will continue to be disciplined about what our other opportunities are out there from a cash standpoint and from delevering in the balance sheet standpoint. But for at -- where we sit right now, we think we’re really well-positioned with our current portfolio.

[Scott Fortune:]

Okay. Thanks for the color. I’ll pass it on.

[Operator:]

And there are no further questions at this time. I will turn the call back over to our presenters for some closing remarks.

[Tom Lynch:]

Well, I appreciate everyone taking the time to join us today. We’re pleased with the progress that we’re making. I am very pleased despite the headwinds -- the macro headwinds that we’re all facing. We just hope that everyone stay safe and healthy. And we look forward to speaking with you all again and thanks for taking the time. Take care.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.