Earnings Transcript for MMEN.CN - Q1 Fiscal Year 2022

Operator: Good day and thank you for standing by. Welcome to the MedMen First Quarter Fiscal 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, that today's call is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Reece Fulgham, Chief Financial Officer.

Reece Fulgham: Thank you. Good afternoon, and welcome, everyone. Today, I am joined by our CEO, Tom Lynch; and Chief Revenue Officer, Tracy McCourt. On today's call, management will provide prepared remarks, and then we will open the call to your questions. Earlier today, we issued a press release, announcing first quarter fiscal 2022 results for the period ending September 25, 2021. The press release, along with our financial statements and MD&A are available on the Company's website and filed on both EDGAR and SEDAR. Before we begin, I'd like to remind you that the comments on today's call will include forward-looking statements, which, by their nature, involve estimates, projections, goals, forecasts and assumptions and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Forward-looking statements relate to, among other things, the business and operations of MedMen, our plans for new stores, our financial, operational, and strategic expectations, and our expectations as to the future sources of funding. These forward-looking statements speak only as of the date of this conference call, and should not be relied upon as predictions of future events. Additional information about the material factors and assumptions forming the basis of the forward-looking statements, and the risk factors are provided in the press release and in the Company's reports filed with the United States Securities and Exchange Commission, and Canadian Securities Regulators. During today's conference call, MedMen will refer to certain non-GAAP measures that do not have any standardized meaning prescribed by GAAP, such as EBITDA, retail adjusted EBITDA, and corporate SG&A, which are defined in the earnings press release we issued earlier today. Reconciliations to GAAP measures are contained in the press release. Please note, all financial information is provided in U.S. dollars unless otherwise indicated. Now with that, I'd like to turn the call over to Tom.

Tom Lynch: Thank you, everyone, for joining us this afternoon, where we will provide another update on the company's turnaround progress, including execution on our transition to growth and plans to drive future growth as well as our financial performance for the first quarter of 2022. The past quarter, we were able to deliver solid year-over-year revenue growth despite a softening in the overall macro environment quarter-over-quarter. During the fiscal quarter, increased COVID cases associated with the delta variant and reduction in government assistance helped drive a sequential deceleration in cannabis sales across the majority of the states we operate in. I'm pleased to say that MedMen's results held up well in this environment. Based on data from headset, we outperformed state level market revenue data on a year-over-year basis in California, Nevada and Arizona. And for the states where we have market data, Illinois was the only state where we lagged the market revenue trends. Let's review the highlights from Q1. Quarterly revenue for MedMen came in at $39.8 million, up 13.4% from a year ago. The sales increase was driven by frequency of transactions and greater traffic and was broad-based with all states other than Illinois posting positive year-over-year sales growth. Sequentially, total revenue came down with 5.1% below the previous quarter, reflecting some of the shifts in the macro environment I mentioned. We posted our fifth consecutive quarter of positive retail EBITDA, which came in at $6.7 million for the quarter, up 29.3% year-over-year. We did see a sequential softening from last quarter's $8.9 million of retail EBITDA. This was largely attributable to lower gross margins. The gross margin decline primarily reflects a more intense promotional environment during the quarter, which we believe was exacerbated by the sequential softening in the macro sales environment. On the expense side, corporate SG&A, excluding preopening costs, increased 42.6% year-over-year to $14.6 million. This was largely driven by a $3.9 million increase year-over-year in professional fees, primarily as a result of litigation costs associated with previous officers of the company. Excluding the impact of the higher litigation cost, the year-over-year increase in corporate SG&A would have been 4.6%. As a reminder, at its peak, the company's corporate SG&A was approximately $160 million annually, meaning even with some elevated legal expenses during this quarter, we are still taking out $100 million in annualized expenses. We made two other recent announcements, I would also like to mention. The first is the promotion of Roz Lipsey to the role of Chief Operating Officer. Roz brings 25 years of operational experience, focusing on business start-up, scaling and strategy. She has a deep understanding of the MedMen business and their skills will be invaluable in our new phase of growth and momentum. I'd like to thank Tim Bossidy for the critical role he played in the implementation and acceleration of MedMen's turnaround plans. Tim is returning to SierraConstellation Partners and has left MedMen well positioned to remain focused on profitability, expanding to new markets and delivering the industry's premier retail experience. We also recently announced an agreement with LitHouse Farms to manage cultivation and manufacturing at our facilities in Desert Hot Springs, California and Sparks, Nevada. LitHouse is one of the most highly awarded cultivators in California, and we're excited to partner with them. We're excited about our growth prospects ahead, with the number of new store openings planned in key markets. We recently opened stores in Orlando and Tallahassee, with more new stores to come in Florida. We plan to open two new stores in California over the next six months, along with two openings in Massachusetts and one in Illinois. As revenue from these new stores comes online, we expect continued progress on profitability metrics. As noted in our fiscal year-end call back in September, we have drastically improved our expense structure, generated momentum in quarterly sales from a year ago and have now posted a positive retail adjusted EBITDA for five consecutive quarters. Looking ahead, we plan to accelerate our growth and push towards company-wide profitability in the coming quarters. As we leverage our national brand recognition to drive new store growth in Florida, California, Massachusetts, Arizona and Illinois. We appreciate the patience and support from our stakeholders as we executed the key elements of our turnaround plan. We could not be more excited to execute on our growth plan and deliver the revenue and profitability numbers we believe this brand is capable of generating. With that, I will hand it over to Tracy McCourt, our Chief Revenue Officer for marketing and operations highlights from the quarter.

Tracy McCourt: Thank you, Tom. And thank you to everyone for joining us today. Today, I'm going to walk through our state-by-state performance as well as what we have set in motion to drive future growth. We remain very excited about the future of MedMen, and we are particularly excited following the announcement during the quarter of the Tilray transaction and the Serruya lead pipes. The funds we raised will provide the fuel we need to execute on our growth plans, including new store openings and increased efforts in marketing and customer experience, delivery, e-commerce and more. During the quarter, total retail revenue increased 17.6% year-over-year with relatively broad-based trends across most of our key states. California revenue increased 18.8% year-over-year. Nevada revenue increased 16.6%. Florida revenue increased 40.7%. New York revenue increased 101.8%. Arizona revenue increased 130.1% year-over-year. And Illinois revenue declined 10.8% year-over-year, excluding Evanston, which was sold in August 2020. We are beginning to see a considerable shift in our customer behavior with customers from our database, increasing their visits to our site, 27% quarter-over-quarter and new users from that group increasing by 37.4%. We continue to see significant strength and engagement with our e-mail campaign as our customers begin to increase how they interact with us in the digital space. With limited opportunities in advertising for cannabis retailers, e-mail continues to be the most responsive way in which to reach our customers, and we continue to see increases in engagement from our customers through this channel. Additionally, we have started to fortify the e-commerce team to enhance site content and shopability and are in-app development now to meet and exceed the shift in behavior and increase both revival and traffic into our doors. Looking ahead, we remain confident that we have the footprint and the balance sheet for growth. We are also starting to see momentum in our cultivation and manufacturing facilities. At our Arizona facility in Mesa, our wholesale revenue increased to $1.2 million, up from $1 million last quarter and up significantly from $0.5 million a year ago. The Mesa facility was also profitable on an EBITDA basis. Now turning to the state level. Our state-by-state walk through today will cover key drivers of revenue and EBITDA profitability during the first quarter and also highlight topics we believe will fuel growth in future quarters. Starting in California. First quarter revenue came in at $24.6 million, up 18.8% versus a year ago. Sequentially, sales decelerated by 2.1% from last quarter's record revenue, which was actually an improved trend versus what state level performance data from headset showed for the industry. We did see a clear impact from increased COVID cases related to the rise of the delta variant during the quarter. The stores that were most impacted were largely in higher tourist areas, such as Abbot Kinney in West Hollywood, which saw quarter-over-quarter revenue declines of 10% and 7%, respectively, lagging the overall trends in the state. California stores outside of tourist locations saw sequential increases in revenue, including Kinney, Mesa and Downtown L.A. Key drivers in California during the quarter included

Reece Fulgham: Thank you, Tracy. First, let me note that we are considered a U.S. domestic issuer under the rules of the SEC and as such, our financial statements were prepared in accordance with U.S. Generally Accepted Accounting Principles or GAAP. Also, consistent with prior quarters, all the figures on today's call are in U.S. dollars. In addition, I'll refer to certain non GAAP measures we believe to be relevant economic indicators. You can find further information on these financial measures in our press release. Overall, we continue to make solid progress year-over-year by most financial and operational metrics. First, let me address our company-wide retail results, which includes the New York operations, which are currently classified for GAAP purposes as discontinued operations. First quarter company-wide transactions were up 20% over prior year and increased broadly across all states, except for Illinois, which was slightly lower than a year ago. Company-wide retail revenue for the fiscal first quarter was $42.8 million, up 17.6% from $36.4 million a year ago. We did experience some sequential softening of trends relative to last quarter. With our stores in tourist markets seeing the largest impact of higher COVID-19 cases associated with the delta variant during the quarter. Overall, MedMen company-wide retail was 5.2% below the prior quarter. Company-wide retail gross margin for the first quarter was $22.3 million or 52% of revenue, an increase of $2.7 million or 13.8% from the prior year. Gross margin rate declined 180 basis points from the prior year, primarily related to increased promotional activity during the quarter. The increased promotional activity reflects our response to higher discounting in the market as a whole, which we believe was intensified given decelerating industry sales during the quarter. To further address and mitigate the impact of competitive promotional environments, our product and merchandising team is well into an initiative to assess product quality and selection on an individual store and local market basis in order to optimize both our SKU portfolio and precious shelf space for both top line and gross margin lift. Company-wide retail operating expenses for the quarter declined as a percent of revenue from the prior year, totaling $14.1 million or 32.9% of first quarter revenue compared to prior year operating expenses of $13.4 million or 36.7% of revenue. Company-wide retail adjusted EBITDA for the quarter was $7.7 million or 18% of revenue, which was $1.9 million or 31.9% higher than the prior year's EBITDA. Sequentially, retail adjusted EBITDA declined by 25.5% relative to the last quarter, primarily as a result of increased promotional pressures. Retail adjusted EBITDA, including distribution expenses for the first quarter was $7.2 million or 16.9% of revenue, which is $2.2 million or 43.4% higher than the prior year. As Tom mentioned earlier, this was our fifth quarter in a row of positive cash flow after tax across our retail footprint. Now, let's take a deeper look at our continuing operations as reported in our earnings release today. On a high level basis, the presentation of our first fiscal quarter 2022 financial results differ from the prior year 10-Q filed as we have reclassified Arizona as continuing operations from discontinued operations, and we have classified the New York operations as discontinued operations from continuing operations. Revenue from continuing operations for the first quarter totaled $39.8 million, up $4.7 million or 13.4% from the prior year. First quarter New York revenue totaled $4.3 million, resulting in total company revenue of $44.1 million. Continuing operations gross margin for the first quarter totaled $17.5 million or 43.9% of revenue, which is a 3 percentage point decrease from the year ago period. The decrease was attributable to higher promotions during the quarter, along with an inventory write-down of approximately $860,000 related to our cultivation and production facilities. First quarter continuing operations, selling, general and administrative expenses totaled $37.2 million, which is $6.8 million or 22.2% higher than the year ago period. Corporate SG&A, excluding preopening costs for the first quarter was $14.6 million, which was $4.4 million or 42.6% higher than the prior year and $2.5 million or 20.6% higher than the prior quarter. The increase was largely driven by a $3.9 million increase year-over-year in legal and professional fees as a result of litigation cost associated with previous officers of the company. Weighted average shares outstanding for the quarter were $942 million, 696,052, driving a per share loss from continuing operations of $0.05, consistent with the prior year's net per share loss of $0.05. Turning to our balance sheet. As of September 25, 2021 the company had total assets of $531.9 million, including cash and cash equivalents of $78.2 million. MedMen was able to raise net cash from investing in financing activities in the first quarter, totaling approximately $89.6 million. As previously announced on August 17, 2021, special purpose vehicle majority earned by Tilray acquired a majority of the outstanding senior secured convertible notes from Gotham Green Partners and other firms. Under the terms of the transaction, Tilray and other strategic investors in the special purpose vehicle acquired an aggregate principal amount of approximately $165.8 million of the notes and the associated warrants issued in connection with the convertible note facility, representing 75% of the outstanding notes and 65% of the outstanding warrants issued under the GGP facility. Prior to the sale of the notes, the company amended and restated the GGP facility to extend the maturity date to August 17, 2028, eliminate any cash interest obligations and instead, provide for payment in kind interest and eliminate certain restrictive covenants. In addition to restructuring, the senior secured convertible notes, we also announced on August 17th, the closing of a $100 million pipe with a group of investors led by Serruya Private Equity. This investment resolves the critical turnaround requirement of stabilized liquidity, which, in conjunction with the restructuring of the senior secured convertible notes properly positions the company for growth and profitability. I would like to provide an update on our cap table as well, given the existence of redeemable securities at our subsidiaries. As of November 5th, we had approximately 1,198,179,933 subordinate voting shares and an additional 91,158,323 redeemable shares at MM can U.S.A., which are redeemable for subordinate voting shares on a one to one basis. Ultimately, our goal every day is to contribute to and drive value creation at MedMen. While our financial results for the first quarter of fiscal 2022 were impacted by the external environment, along with pressure from legal expenses, we continue to make significant strides to position the company structurally for long-term scalable growth in existing and new markets. Overall, I remain very encouraged by the improved operating results year-over-year, stabilized liquidity and restructured balance sheet resulting from the Serruya and Tilray transactions. The entire MedMen team remains focused on executing our growth plan, increasing our cultivation capacity and aggressively expanding our store footprint in key markets. In conclusion, let me again recognize and show my appreciation to all of the MedMen team members, on the retail floor, cultivation and distribution facilities and back office, to continue to strive diligently toward our goal to be the best cannabis experience available to the public now and in the future as cannabis use is further normalized. MedMen will continue to provide a welcoming, safe and educational environment and highest quality cannabis to both novice and experienced consumers. We will now open the call to your questions. Operator?

Operator: [Operator Instructions] And your first question comes from the line of Bill Papanastasiou from Canaccord Genuity. Please go ahead.

Bill Papanastasiou: Hi, thanks for taking my call. Apologies if this was answered earlier in the earnings call, I was connected a bit late. But obviously, we're seeing a lot of discussion of price compression from some of the leading operators in the state of Florida. I was wondering whether you can provide some outlook into the next quarter? And whether this has impacted the growth strategy in the Florida market? Any color that you could provide there is greatly appreciated.

Tom Lynch: Sure, Bill. This is Tom. Thank you for the question. And spot on. So we've spoken about the growth strategy in the Florida. We love Florida. We love the market. But we are going to be deliberate in how we expand into the state. So, we have aggressive goals there. We just opened another store in October in Tallahassee. But with the price compression that's going on down there, we're going to be more deliberate. We're going to launch and see how this settles out because the promotions aren't necessarily tactical SKU based on the way that -- we could talk about in California, they're more 40% off of the box, right? And it seems that the largest players in the state are doing that in order to simply retain market share. Perhaps it was an investment strategy to gain market share. It doesn't appear that, that's happening. And it seems that they're flat. So, while the biggest players in the state choose to have that battle, we're going to continue to operate, focus on unit economics in the state and be more deliberate. We have not changed our view on Florida long term. But we're going to be very disciplined in how we expanded that right now.

Bill Papanastasiou: Great. And if I can squeeze in another question. Obviously, the company is really focused on promoting products through your e-mailing marketing campaigns. I get them myself, and I've seen the promotions you guys have run. I was wondering if you could provide any metrics, maybe I missed this on in terms of how this is translating into new customers in some of your key markets?

Tom Lynch: Sure. I'll turn that over to Tracy. I mean that is a narrative that you should expect to hear from us whenever we speak going forward, right? Our focus here is on unit economics, right? The productivity of every one of our boxes and all the contributing factors to that. So, when we start talking about other channels that are ultimately their tools, frankly, for us to drive traffic, conversion, be educational. You should expect to hear this narrative because we are data people here, and we have put a stake in the ground saying that this is the premier retail cannabis experience in North America, and it is, and it's going to continue to improve. So we measure everything, what you're receiving from us is not -- it's well thought out and we look at the results as they come in and they help us build our assortment and our promotional cadence and all that. So Tracy, if you want to jump in and give some of the metrics because we did, Bill, we did offer some of that in the earlier text.

Tracy McCourt: That's a great question. So, we're actually really excited by our new customer acquisition, specifically on the e-mail side of it. What we're seeing today is about 40% of the engagement in the activity comes from newly acquired or acquisition people who never purchased those before. And we are also seeing that more of them are coming to the site, which is really interesting, even more as a percentage than our core customers. So, I would say that we're excited about what we're seeing with our prospects or acquisitions today. And in addition, it's really a key initiative for us in our stores to continue to capture customer information through our loyalty program or just through our POS system, so that we can continue to market to those people.

Bill Papanastasiou: Great. That's all I have. I very well appreciate the color.

Tracy McCourt: Great.

Tom Lynch: Sure thing. Thanks for the question.

Operator: [Operator Instructions] [Call ends abruptly]