Earnings Transcript for MMEN.CN - Q2 Fiscal Year 2021

Operator: Ladies and gentlemen, thank you for standing by. And welcome to the MedMen Second Quarter Fiscal 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Reece Fulgham, Chief Financial Officer. Please go ahead. Ladies and gentlemen, please standby, we are experiencing Technical Difficulty. Mr. Fulgham, please go ahead.

Reece Fulgham: 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. Earlier today, we issued a press release announcing second quarter fiscal 2021 results for the period ending December 26, 2020. The press release, along with our financial statements and MD&A, are available on the company's Web site 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 and operational and strategic expectations and our expectations as to 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 risk factors are provided in the company's reports filed with the United States Securities and Exchange Commission and Canadian Securities Regulators, including the company's earnings press release and MD&A, which was issued earlier today and is available under the company's profile on both EDGAR and SEDAR. 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, 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 and our MD&A. 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. On the call today, we'll provide an update on the company's turnaround progress and plans to drive future growth and then discuss our financial performance for the second quarter. First, we're thrilled at the increased enthusiasm in the sector as U.S. makes continued progress towards broader cannabis legalization which will lead to better outcomes in our criminal justice system, healthy alternatives in a number of medical applications and we believe more optimistic and peaceful world to live in. We are impressed with how quickly Arizona was able to flip through recreational sales in 2021. We are excited about continued progress in our core markets. Jumping in more fiscal second quarter, our sales were up slightly, excluding Evanston. Despite the significant restrictions in foot traffic in California would show both the dynamism in our channels and the robustness of our business to shocks. We also showed significant continued progress in Florida, in New York with sales up 67% and 42%, respectively from prior year. Critically, we also saw another significant expansion in our retail gross margin. I've done a number of turnaround situations and for those familiar with retail turnaround stories, often you will see retailers drastically reducing margins in an effort to liquidate sale inventory, or simply to bump sales. We are in the exact opposite position than that. We have expanded retail gross margin now from 51% in Q2 2020, to 57% in Q2 2021 building a phenomenal platform for future profitability. We look forward to accelerating growth in the remainder of our fiscal year and continued progress in our turnaround plan. The core of the turnaround plan remains our four wall economics. We continued our strong progress from the first quarter, with weekly same-store sales across the portfolio trending up over 3% before retail capacity in California was restricted from 50% to 35%, and ultimately 20%. Still, we were able to hold the line for the quarter in sales and retail EBITDA, despite California taking an outsized COVID-related impact. During the second quarter we generated 33.8 million in revenue, representing 1.2% increase from the previous quarter excluding Evanston. We are roughly flat with regards to adjusted retail EBITDA. And this is the second quarter in a row; we achieved positive cash flow after tax across our retail footprint. A significant milestone to note, if this had not been done before these two consecutive quarters in the company's history. Other key elements of the turnaround plan we have achieved are continuing to reduce corporate related SG&A and continuing to attract world-class talent. Both of these build the foundation for a scalable enterprise ahead of all the macro tailwind beginning to gather behind us. As a reminder, at its peak, the company's corporate related SG&A was approximately 160 million annually. We continue to reduce our spend with our corporate SG&A this quarter just over 9.2 million, excluding pre-opening costs that had been previously disclosed and other 1.1 million decreased quarter-over-quarter. However, even with this reduction in spending, we continue to improve overall efficiency and talent across the organization, including bringing on leaders like Tracy McCourt, our new Chief Revenue Officer, formerly Chief Strategist at Zappos. It speaks to the strength of the brand and the belief in the turnaround plan, then we've been able to retain such talent. With regards to corporate governance. We're also pleased to announce that I accepted the position of Chairman of the Board and we canceled 815,295 Class A super voting shares. As someone who's been in the Chairman and CEO seat before, I pride myself on my accountability to shareholders, its responsibilities that I and this organization take it very seriously. From a balance sheet perspective, we're able to continue the benefits of our different cash commitments and attract capital from both new and existing capital partners. During the quarter, we also modified certain covenants for additional flexibility, further evidence of the belief our capital partners have as the long-term value of the business. Although still work to be done to strengthen our cash position, we announced an additional 10 million in funding from Gotham Green Partners in January and we believe we are more investable than ever with a line of sight to profitability. Finally, last quarter, I hit on my excitement around acceleration of growth in existing markets such as California and Florida, where we have a number of high profile stores set to open over the next 10 months, as well as new markets like Massachusetts, where we have some of the best locations in the state. We've been slightly delayed in our Emeryville openings in California and our [indiscernible] opening in Miami Beach, who are hard at work to get those doors open in the next several months. We're on schedule for two openings in San Francisco, our two openings in Massachusetts and our significant pipeline of openings in Florida on the back of our ongoing Eustis expansion. We believe we have the ability to open up to an additional 10 stores in Florida this year. And we view our growth strategy there as one of the most exciting opportunities we given our ability to open an unlimited number of dispensaries as we continue to execute in cultivation and manufacturing. We appreciate the patience and support of stakeholders as we continue to execute. And we strongly believe that patients will be rewarded for the bright future ahead of us. With that, I'll hand it over to Tim Bossidy, our Chief Operating Officer for operations highlights.

Tim Bossidy: Thank you, Tom. First, I like Tom some optimistic about the durability of our model, which as we mentioned in our last earnings call, we believe will be well positioned, even with the retail capacity restrictions in California. This is borne out in a way where we're even more excited for the future here MedMen. There's also been fantastic welcoming Tracy and Reece to the team and together with the rest of leadership; we're positioning MedMen for a significant success this year. Our key KPI continues to be retail cash flow, which again, stems from improving and removing complexity from our supply chain and our cultivation facilities, so materializes in our retail EBITDA. We will continue to find operating leverage and looking forward four wall cost and we will continue to drive gross margin gains but the key focus for us now is driving additional revenue to our existing stores. Some of our key ongoing initiatives include continue developing the quality of our shelves in Florida. As Tom mentioned, we saw same-store sales in Florida jump 67% year-over-year and 43% quarter-over-quarter. Not only have we focused on expanding our cultivation capacity, which we will touch on shortly. But we have continued to increase the quality of our flower production, with our recent CLA showing THC levels of 28%, double cannabinoids over 32%. Even more exciting, in December, we agreed to a licensing agreement with BellRock brands to manufacture, distribute and sell Mary's Medicinals and Dixie in our Florida stores. We expect to launch initial products, including topicals, transdermal patches, gels and ingestibles in Florida, with MedMen in the next few months pending regulatory approval with the balance of our portfolio coming online throughout the remainder of the year. We believe we are just scratching the surface of our potential in Florida, we could not be more excited to partner with BellRock brand. Next is investment and customer connection. We have significantly ramped up our investment in creating stronger links to the customer. This starts with the development of an enterprise CRM system, which we are now undertaking through a newly formed partnership with one of the top CRM providers in the U.S. This partnership will provide us with robust insights into our customer behaviors, enabling us to increase content relevancy and anticipating customers' needs to drive sales volume and purchasing frequency. The systems integration is set to begin within the next 30 days. We've also deepened our focus on localization, particularly in markets that were previously focused on tourism. In Las Vegas, we realized an 80% increase in email conversion, focusing on local messaging versus traditional last chance deals. Recently in the Las Vegas market, we reversed sales declines and are now seeing increases in weekly revenue. With regard to products in California, we have seen early results from our dynamic pricing model and have begun rolling out tests to increase velocity and the four brands that we are testing, Golden State, Cannabiotix, THC design, and Claiborne; we have seen significant lift up over 20% in revenue. Our ability to test and analyze will only increase upon successful completion of our CRM [limitation] [ph]. The successful relaunch of MedMen in Redding, California, has shown we also have the ability to launch a dramatically successful private label, which we will roll out to other states and continue to grow in California. The relaunch in California is on track, exceeding $1 million in revenue within its first 90 days. This specific strength in our pre roll category, which is performing above expectations on an aggressive plan, as well as in our flower category, where we placed three MedMen flower seeds into our top 15 overall since launch. Finally, as you can see in our financials, due to our turnaround plan and emphasis on operations, we will spent next to nothing and marketing over the past several quarters, yet measured to customers looking for our stores in our core markets, we are still the most sought after retail brand in cannabis. We have maintained and improved our customer connection through execution. And as we progress in our turnaround plan and test the most effective uses of our marketing spend, as well as grow our capital allocation and marketing, we believe we are primed for significant acceleration, especially in delivery. Delivery is an opportunity we are under penetrated in and we are starting to make strides even ahead of increased marketing spend, in part because of our cost efficiency and implementation of scheduled delivery, we were able to decrease our free delivery minimums to $49 and within a short order afterward, saw transactions move up over 40% and delivery revenue move up over 20%. Turning into our main retail cost drivers, I will discuss several initiatives that we were able to achieve during the quarter. Our gross margins expand again in detail, despite our deliberately choosing to be more promotional during the holiday period and after the additional California restrictions were implemented. Quarter-over-quarter, we increased from 54% to 57% and up from 51% year-over-year. On the go forward, we will continue to improve from additional pricing in terms of our key vendors as well as some of the attractive margins we have started to realize with MedMen Red. In aggregate, our continued execution on our four wall efforts has enabled us to achieve our second full quarter of being cash flow positive on an after tax basis with an adjusted retail EBITDA margin of 17%. Next, I'd like to spend some time providing an update of progress in each market, starting with our recreational market. There's nothing for California, we continue to push ahead with two new stores in San Francisco and our store in Emeryville. With our Emeryville opening currently targeted for April. In Nevada, we believe our focus on the local market, as mentioned above, will pay dividends and we believe we will start to see a significant up tick in the coming quarters from the combination of the turn of tourism, newly established vendor relationships and a cultivation partnership that will allow us to scale with the relaunch of MedMen Red in Nevada as well. In Illinois, our Oak Park location continues to be the best performing store in the National portfolio in terms of revenue. And we have made significant progress towards our expansion both with that store and was opening a secondary license in that market in a location review will be similarly attractive. In Massachusetts, we are also continuing our progress towards opening the two stores that we have been granted our provisional abilities licenses, with Fenway targeted for a summer opening. As we've mentioned before, Fenway is being one of the best locations in our entire portfolio. In our medical markets, we continue to take pride in our shrink to grow plan, especially because of the significant growth we've shown within Florida revenue and total in the robust pipeline we ever had. In Q2 2020, last year, our total Florida revenue was $1.9 million with the eight stores open. In Q2 this year that was $3.1 million and four stores open. We will add our fifth and sixth stores in the next several months, driven by yields growing over 50% quarter-over-quarter. We also decreased our cost per pound by over $150. We are underway with our recent expansion project, which as a reminder will allow us to power up to 14 stores in calendar '21. In all other medical market, New York, we saw continued improvement in our four locations driven by a deeper shelf and new vendor partnerships, as well as continued execution in our cultivation and manufacturing operation. And as an update on our cultivation and manufacturing strategy in Desert Hot Springs, in Mustang, during the first quarter, we announced we had landlord support to proceed partnerships in our two facilities. We are up to announce something shortly. While finalizing agreements has taken longer than ideal, we believe successfully managing the complexity of these arrangements and the ultimate cash flow impact will be worth the wait. With that I will hand it over to Reece.

Reece Fulgham: Thank you, Tim. First, I note that for the second quarter, 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. GAAP. Also consistent with prior quarters, all the figures on today's call are in U.S. dollars. In addition, I'll refer to our top-line performance in terms of system wide revenue. As we believe that this is the best representation of our economic progress. You can find further information on these financial measures in our MD&A for the second quarter. Overall, we continued progress from the last quarter, which was the best quarter in the history of the company in terms of revenue growth, profitability and cash burn. System wide revenue for the fiscal second quarter was $33.8 million, up 0.3% from $33.7 million in the previous quarter excluding Evanston. Gross profit for the quarter was 17.9 million, leading to a gross margin of 53%, a 6 point increase over gross margin in the previous quarter. This increase is reflective of the fact we continue to make strong improvements to our gross margin due not only to the increases in retail margin, but due to increased operational efficiency in cultivation and manufacturing. Operating expenses to the quarter totaled $44.4 million, a 46% decrease from the $82.2 million in the prior year period, within operating expenses, general and administrative expenses, which totaled $33.6 million, declined by 44% from the same period last year, and increase of 6% from the previous quarter. The reduction in general and administrative expenses was primarily driven by a significant reduction in corporate related expenses, including payroll, professional fees and deal costs. Our second quarter selling, general and administrative expenses, excluding deal costs and stock-based compensation totaled approximately $30 million, a 49% decrease from the same period last year and a 2% decrease from the previous quarter. Further, our second quarter corporate SG&A excluding pre-opening costs totaled approximately $9.2 million, a 66% decrease from the same period last year and a 10% decrease from the previous quarter. While there are other additional optimization opportunities, we believe our corporate infrastructure is now at the appropriate levels for both managing our existing asset base and supporting the growth we expect over the next 12 to 18 months. Turning to profitability, overall adjusted EBITDA loss for the quarter was $11.8 million, compared to $33.4 million in the same period last year and $11.7 million in the previous quarter. As revenue continues to rebound from the early days of COVID and as we move our cultivation and production partnership discussions at DHS and Mustang alone, we believe there's a clear path to achieving positive EBITDA, especially considering the retail profitability we were able to achieve this past quarter, which I'll get into shortly. Overall, net loss attributable to shareholders of MedMen was $49.7 million for the second quarter, or $0.11 per share compared to $41.3 million or $0.02 per share in the previous year. Now let's take a deeper look at our retail business. Retail revenue for the second quarter totaled $33.8 million, up 1.2% sequentially adjusted for the Evanston divestiture. The relatively flat revenue was driven by our California footprint, which was on pace for a same-store sales increase this quarter over the previous quarter, until mid-November, when we saw significant additional capacity restrictions due to COVID-19 in California. We believe this period while challenging, has shown the importance of the flexibility in our model and the value we derive from our robust and efficient curbside pickup and delivery options. Our product assortment and quality has also continued to improve and we are seeing this in customer feedback, increased web traffic and of course, increased margin. Moving down to retail gross margin, we recorded our best quarter ever, at 57% nationally. During the turnaround, we have worked hard to build back vendor trust. And in sticking to our commitments to clean up old balances, providing unrivaled visibility and shelf space and consolidating our product portfolio. We've developed extremely strong relationships with our key vendors in each of our markets on pricing and payment terms that are very favorable to MedMen. And we want to be clear, we are not done with our retail gross margin expansion. There's still significant opportunity to expand margins in markets like Illinois and Nevada, as we improve our wholesale relationships in each market and look to secure additional supply agreements. We maintained our overall adjusted retail EBITDA decreasing slightly quarter-over-quarter but up from negative 5% to positive 17% year-over-year. We have some additional costs and efficiency improvements. We will see rolling through in the coming quarters. But overall, the increases in retail EBITDA margin in the go forward will be driven by our projected increases in sales. There's a significant amount of operating leverage in our platform as we drive additional traffic and more visits. Critically, even when factoring in federal, state and local taxes we were cash flow positive for the quarter across retail for the second quarter in a row, which until last quarter had never been accomplished in the company's history. As top-line normalizes and our gross margins continue to expand, we are positioning ourselves to cover our corporate costs and new store pipeline through the cash flow we generate across our stores. Turning to our balance sheet, we ended the quarter with $7.5 million cash and cash equivalents. As Tom mentioned, we did raise an additional $10 million from Gotham Green Partners in January and we will continue to work closely with our Capital Partners to fund the final stretches of our turnaround plan. We also announced this month we are partnering with Moelis a strategic advisor as we look to potentially diversify our funding sources and deleverage our balance sheet. I want to continue to provide updates on our cap table as well. Given our multi-class structure as of February 15, we had approximately 519,098,036 subordinate voting shares and an additional 143,839,755 million redeemable shares, which are convertible into subordinate voting shares on a one-to-one basis. In conclusion, I am excited to join the MedMen team. I think the MedMen team has done a fantastic job in the turnaround so far. And I think fiscal 2021 looks bright for MedMen. With the talent we continue to add, with the renewed momentum in the sector as we move toward common sense cannabis legislation in addition to the improvements we make financially and operationally every day, I can say this is one of the most exciting growth stories that I've been a part of. We are well positioned to grow our footprint and become profitable and in so doing provide even more patients and customers with the best experience in cannabis retail. We will now open up the call to your questions. Operator?

Operator: We don't seem to have any questions at this moment. I'll turn it over to the presenters. Q - Unidentified Analyst A - Unidentified Company Speaker

Tom Lynch: This is Tom once again. Thank you all for joining us today and listening to our presentation. As we said this is an exciting story. We're very, very pleased with where we are right now. We hope that as COVID begins to loosen and restrictions begin to loosen, our capital increase and add a new element to our story. So we're very pleased to have this group here today with us. And thank you again for your attendance before speaking with you again.

Operator: And this concludes today's conference call. Thank you for joining. You may disconnect.