Earnings Transcript for MMEN.CN - Q4 Fiscal Year 2021

Operator: Good day, and thank you for standing by. Welcome to the MedMen Fourth 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.

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 fourth quarter and full year fiscal 2021 results for the period ending June 26, 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 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, the recently announced transactions with Serruya and Tilray, as well as our financial performance for the fourth quarter and fiscal year 2021. The past quarter was a pivotal one for MedMen. When we joined MedMen 18 months ago, we set out to stabilize this company and return it back to a growth trajectory that aligns the power of the brand, which we believe is the leading retail cannabis brand in North America. We've done that. We've drastically improved our expense structure, generated momentum in quarterly sales and have now posted positive retail adjusted EBITDA for four 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. Let's now review highlights from the fourth quarter and fiscal 2021 results. Revenue trends during the fourth quarter continued to show sequential growth coming in at $42 million for quarterly revenue at MedMen. This increased 18.5% sequentially from the third quarter's $35.4 million and it was up 55.4% year-over-year. The sales increase was driven by frequency of transactions and greater traffic and was broad-based with all states other than Illinois posting positive sequential sales growth. While our full year fiscal '21 performance showed a slight revenue decline to $145.1 million versus $155.3 million from the prior year, COVID had a profound impact on our results, particularly during the first half of the fiscal year. And we have ended the year in a much better place as pandemic restrictions moderated during the last two quarters. Profitability metrics reflect a dramatic turnaround for the company. The fiscal year retail adjusted EBITDA increasing to $28.1 million from $5.9 million a year ago. Company-wide EBITDA for fiscal '21 improved by $25.7 million year-over-year. This is especially exciting in context of where we started. We think taking a moment to reflect on this adds significant credibility to us saying, first, we needed to focus on a turnaround and profitability reset, and now we can turn to growth and we have the platform to do it. In Q2 2020, the last reported quarter before we started, total, inclusive of New York, adjusted EBITDA was approximately negative $34 million. This quarter, there was also a one-time inventory adjustment add-back of approximately $11 million in operations. Without that one-time add back, quarterly adjusted EBITDA would have been approximately a $45 million loss of a revenue base of $48 million. The annualized difference between that in this quarter's total adjusted EBITDA is over $140 million. Let me repeat that. Annualized adjusted EBITDA of over $140 million. We think that context is incredibly important because it scales how much work needed to be done and where all management focus needed to be. At the same time, we were overlevered and undercapitalized and needed to work to transform the balance sheet. Also, we're in a pandemic with severely restricted capacity in California and Nevada. And at one point, a number of our stores had to close completely due to looting and damage. This operational progress has allowed us to attract strong partners to shape our balance sheet. The amendment and extension of our debt, along with the $100 million equity investment, gives us the flexibility and firepower to match our revenue trajectory to our operational expertise and renowned brand. With the transfer of a large portion of our notes by Gotham to Tilray, and the agreement to amend and extend our convertible notes, we have refocused covenants, which were previously an administrative burden and cost driver to reflect the fact MedMen is a high potential and high-growth company. We have also extended the debt maturity by seven years and eliminated cash paid debt service, allowing us to prioritize new market opportunities and existing operations over near-term balance sheet management. The $100 million equity investment led by Serruya Private Equity will allow MedMen to expand its operations in key markets, including California, Florida, Arizona, Illinois and Massachusetts, and identify and accelerate further growth opportunities across the United States. We have significant opportunities for growth in all of our key markets, and this fresh capital allows us to capitalize on these opportunities and execute on our growth plans. The two transactions together have also allowed us to remove the going concern risk language for our most recently reported financial filings. We continued to see progress on profitability during the quarter. In addition to the full year, as we posted our fourth consecutive quarter of positive cash flow after tax across our retail footprint. We measure this by retail adjusted EBITDA, which was $8.9 million during the fourth quarter, up 8.6% from the third quarter and compared to negative $200,000 in the comparable period last year. This represents an annualized improvement of $37 million. On the expense side, corporate SG&A grew about half the rate of sales growth, increasing 9.7% sequentially to $12.1 million. As a reminder, at its peak, the company's corporate SG&A was approximately $160 million annually. Importantly, corporate SG&A was not up because we felt we had to scale headcount for our additional growth, but was predominantly due to a one-time bonus reversal benefit of $1.2 million we took in Q3. We're excited about our forthcoming growth prospects, with 14 new store openings planned in key markets. In addition to our recently opened Orlando store, our current plans include two new stores in California over the next six months, nine new stores in Florida over the next six to nine months, two openings in Massachusetts and one in Illinois. As revenue from these new stores come online, we expect continued progress on profitability metrics. We appreciate the patience and support from our stakeholders as we executed the key elements of our turnaround plan. We believe this patience has paid off as we have taken a significant step forward with the recent Tilray and Serruya transactions. 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'll hand it over to Tim Bossidy for operational highlights.

Tim Bossidy: Thanks, Tom, and thanks, everyone, for joining us today. As I have the last few quarters, I will walk through our state by state plans and progress as well as what we have set in motion to drive future growth. Like Tom, I'm more excited than ever about the future of MedMen. At the state level, sales increases were broad-based in Q4. California revenue for the fourth quarter was up about 24% versus third quarter; Nevada revenue was up about 44%; Arizona, up about 17%; Florida, up about 11%. In New York, discontinued ops, was up about 12% quarter-over-quarter. Illinois did comp down slightly, which we will touch on in more detail. I'd also like to note that this quarter brought in our most successful day and week in the history of MedMen during the 4/20 Holiday. That fiscal week, we achieved over $4 million in revenue and generated over $800,000 in revenue on 4/20 itself. What is exciting to us about this landmark is that it shows proof that we now have scalable pieces of infrastructure in place as we continue to refine our model. Certainly, there are a number of opportunities to improve and future-proof our platform but during the turnaround and restructuring process, while we cut, we did not cut to the bone, and we are ready to continue to scale upwards. Now as we look ahead, we have the footprint, the balance sheet, momentum in stores and as I mentioned before '20, a scalable infrastructure for growth at retail. We're also starting to gain significant momentum in our cultivation and manufacturing facilities. At our Arizona facility, Mesa, revenue nearly doubled year-over-year, increasing 98%. We also saw strong trends at our Florida facility, Eustis, with revenue increasing over 200% year-over-year and 37% sequentially. Both Mesa and Eustis also generated positive EBITDA for the quarter, adjusted for inventory write-downs primarily associated with how we cost. Those adjustments essentially just mean we posted sequential improvement in operating efficiencies. But the highlight here is that at these facilities, we generated positive EBITDA for the quarter. We continue to make strides in both yields and potency, and we have now identified potential expansion opportunities at Mesa, in addition to the previously discussed expansion at Eustis, we continue to pursue. Going a little more granular state by state, in California, fourth quarter revenue grew 24.4% sequentially to $25.2 million. California accounted for 55% of the company's retail EBITDA in the quarter and increased sequentially as well, driven by higher top line volume. Key drivers in California during the quarter included

Reece Fulgham: Thank you, Tim. 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. 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 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 quarter-over-quarter 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 as discontinued operations and Arizona operations, which were previously classified as discontinued operations, but are now included in our GAAP operating results as continuing operations. Company-wide transactions were up 20% for the fourth quarter, driven mainly by broad growth across all states, except for Illinois, which was slightly lower than the prior quarter. Company-wide retail revenue for the fiscal fourth quarter was $45.2 million, up 19.4% from $37.8 million in the prior quarter. For the full year, company-wide retail revenue was $154.3 million, down 5.6% from $163.5 million in the prior year. California and Nevada continued for meaningful progress recovering from the COVID-19 impact on business and occupancy restrictions. California retail sales increased by 24.4% quarter-over-quarter, and Nevada improved by 44.1%. The company-wide retail gross margin for the fourth quarter was $24.4 million or 54% of revenue, an increase of $3.7 million or 17.8% from the prior quarter. Company-wide retail operating expenses for the quarter totaled $14.1 million or 31.1% of revenue compared to the prior quarter operating expenses of $11.5 million or 30.4% of revenue. Third quarter expenses included a onetime bonus reversal benefit of $1.2 million. Full year company-wide retail gross margin was $84.4 million or 54.7% of revenue, up from $81.1 million in the prior year. Full year company-wide retail operating expenses totaled $51.6 million or 33.4% of revenue, a decrease of $24 million from the prior year. Company-wide retail adjusted EBITDA for the quarter was $10.3 million or 22.9% of revenue, which is $1.1 million or 11.9% higher than the prior quarter and $10.9 million higher than the prior year's negative adjusted EBITDA of $590,000. For the full year, company-wide retail adjusted EBITDA was $32.8 million or 21.3% of revenue compared to last year's $5.5 million. Retail adjusted EBITDA, including distribution expenses for the fourth quarter was $9.6 million or 21.2% of revenue, which is $1.1 million or 12.3% higher than the prior quarter. Full year retail adjusted EBITDA, including distribution expenses, was $29.2 million or 18.9% of revenue. As Tom mentioned earlier, this was our fourth 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 fourth fiscal quarter and full year fiscal 2021 financial results differ from the prior quarter 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 fourth quarter totaled $42 million, up $6.5 million or 18.5% sequentially. Full year revenue from continuing operations totaled $145.1 million compared to $155.3 million in the prior year. The decrease year-over-year was primarily due to the impact of COVID related restrictions in California and Nevada. Continuing operations gross margin for the fourth quarter totaled $19.7 million or 46.9% of revenue, which is a $5.4 million increase from the prior quarter. Continuing operations gross margin for the fiscal year totaled $67.3 million, an $11.9 million increase from the prior year. We expect overall continuing operations gross margin to improve going forward as we deepen our partnerships in cultivation at DHS and Mustang, where we still carry significant fixed costs. Fourth quarter continuing operations, selling, general and administrative expenses totaled $33.5 million, which is $3.7 million or 12.4% higher than the preceding quarter and $5.3 million or 13.7% lower than the prior year. For the full year, continuing operations, selling, general and administrative expenses declined $77.7 million or 38.2% to $125.7 million, down from $203.4 million in the prior year. Corporate SG&A for the fourth quarter was $12.1 million, which was $2.9 million or 19.1% lower than the prior year and $1.1 million or 9.7% higher than the prior quarter. Primary reason for the sequential increase is an accounting adjustment recorded in Q3, reversing a bonus accrual expense of $1.2 million. For the corporate SG&A was $42.6 million, which was $46.2 million or 52% lower than the prior year. For the fiscal year, net loss from continuing operations totaled $145.4 million, which improved from $456.6 million in the prior year. Included in the 2020 loss from continuing operations was an asset impairment charge of $246.7 million. For the full year, net loss attributable to shareholders of MedMen Enterprises improved to a loss of $124.1 million from a $247.2 million loss in the prior year. For the fiscal year, weighted average shares outstanding was 530,980,011, driving a per share loss from continuing operations of $0.22, an improvement from the prior year's net per share loss of $0.66. Turning to our balance sheet. As of June 26, 2021, the company had total assets of $472.5 million, including cash and cash equivalents of $11.9 million. MedMen was able to raise net cash from investing in financing activities in fiscal 2021, totaling approximately $62 million. As previously announced and subsequent to year-end, the transformative note amendment and pipe transactions solidified several integral turnaround components, including

Operator: [Operator Instructions] And your first question comes from the line of Matt Bottomley of Canaccord Genuity.

Matt Bottomley: Yes. Thank you. Good afternoon, everyone, and congrats on the quarter and the previous Tilray announcement. I just wanted to get your - any additional thoughts on your primary market of California here. And if the growth that you saw - and how the growth that you saw in the quarter sequentially relates to what the state did overall? And if there was anything specific to the traffic patterns at the MedMen stores that might not translate the sort of average store profile in the state? And then if you could also comment on any risk that you see, if any, on the California market looking to consolidate some of its regulations and how that might impact the Los Angeles market specifically?

Tom Lynch: Yes. Matt, this is Tom. Thanks for the question. California performed particularly well this quarter, has a lot to do, frankly with, as we've talked about before, we've talked about our go-to-market strategy, right, where we've been and become much more embedded in which the communities that we're fortunate enough to have dispensaries. So we're not just simply a tourist-driven go-to-market strategy as this company originally was. We certainly - we have a great, broad, diverse offering that caters to all types of folks. But I would point towards MedMen regaining, frankly, more than its share and growing its market share as a result of the quality of our assortment, the depth of the assortment and then just frankly, the retail experience. When you talk about this turnaround, we talk about, first, the boxes, when we got here, we had negative 8%, 6% to 8% EBITDA contribution for stores. We're now north of 20% across the portfolio. And so we had to prove that organically, we're able to grow because if we can't fix our own stores, then what is the point of talking about expansion, and we continue to prove that quarter-over-quarter. So very pleased with California. Very honestly, bullish on the market. It's been challenged, obviously, but we're very bullish on what's taking place there. Tim or Reece, anything you'd like to add?

Reece Fulgham: I would just quick, I think when you look at the other adult-use states in the country, California still looks a little bit underpenetrated or potentially significantly under-penetrated when it - legal cannabis sales per potential consumer. And so I think with that, we'll definitely continue to work hand-in-hand with the state, be ahead of all of our peers from a compliance standpoint. But I think there's a lot of room for a here. And so given the conservatism in the state around COVID restrictions, I don't think that was part of the question. There's - we'll always keep watching that. But for now, it looks like the market is continuing to open up, and we think there's a lot of room to run here.

Matt Bottomley: Thanks, Matt.

Operator: [Operator Instructions] There are no further questions at this time. And this concludes today's conference call. Thank you for participating. You may now disconnect.