Ascend Wellness Holdings, Inc. (AAWHU) Earnings Call Transcript & Summary

Good morning, and thank you for standing by. Welcome to AWH Fourth Quarter and Full Year 2023 Earnings Call. I'd now like to hand the conference over to your first speaker today, Rebecca Koar, Executive Vice President of Investor Relations and Strategy. Please go ahead.

Good morning, and welcome to AWH's Earnings Call for the Fourth Quarter and Full Year 2023. The presentation that accompanies this call can be found on our website, awholdings.com/investors. Before we proceed, I would like to remind you that there are several risk factors and other cautionary statements contained in our SEC and SEDAR filings, including our annual report on Form 10-K. We will not review those risk factors and other cautionary statements on this call. However, we encourage you to read them carefully. Various remarks on this call concerning expectations, predictions, plans and prospects constitute forward-looking statements or information. These forward-looking statements or information are subject to risks and uncertainties that may cause actual results to differ from historical or anticipated results. Any forward-looking statements reflect management's current view only. We undertake no obligation to revise or update such statements or make federal forward-looking statements in the future, except as required by applicable law. References may be made during this call to future-oriented financial information and financial outlook, all of which are subject to the same assumptions, risk factors, limitations and qualifications as forward-looking statements. And we believe that such estimates have been prepared on a reasonable basis, reflecting best estimates and judgments, the actual financial results of the company may vary from the amounts discussed herein and such variation may be material. During today's call, we will be referring to non-GAAP measures, such as adjusted gross profit and adjusted EBITDA as defined and reconciled in our earnings material in the appendix of the presentation. These non-GAAP measures as defined by AWH, may not be comparable to measures with similar titles used by other companies. Certain information that may be mentioned during this call, including industry information and estimates is obtained from third-party sources, including public sources, and there can be no assurance as to the accuracy or completeness of such information. Although believed to be reliable, management has not independently verified any of the data from third-party sources. On today's call, we have Abner Kurtin, Executive Chairman; John Hartmann, Chief Executive Officer; and Mark Cassebaum, Chief Financial Officer. With that, I'll turn the call over to Abner, starting on Slide 4.

Thanks. Good morning, everyone, and thank you for joining our Fourth Quarter and Full Year 2023 Earnings Call. As always, I would like to thank our valued stakeholders for helping us deliver a strong Q4 and full year 2023. Before turning it over to John and Mark for an in-depth discussion on our business and financial outcomes, I'd like to provide a brief update on pivotal market and regulatory developments, followed by key highlights about Ascend. We are eagerly awaiting significant advancements in federal cannabis reform and remain optimistic about the positive changes on the horizon. Our outlook centers around the anticipated rescheduling of cannabis from Schedule I to Schedule III. This potential major catalyst hinges on the DEA issuing a proposed ruling agreeing with the health and human services recommendation to move cannabis to Schedule III. We expect the DEA to align with the recommendation process, and their ruling would likely be followed by a public comment period and a hearing. Although the exact time line for the DEA's ruling remains unclear, we hope this will transpire before the upcoming presidential election and are pleased to see continued pressure being put on the DEA from many governors, legislators and attorney generals who have banded together in various calls for action. The President's mentione of cannabis at the most recent state of the union address was a historic and encouraging conclusion on the topic. Furthermore, we are happy to see how well this inclusion resonated with the American people. We are particularly excited about the potential outcomes of this progression as we anticipated it could ignite enhanced access to capital, a likely reduction in the cost of capital and a reduced tax burden on the industry. Additionally, we think a federal catalyst will bring further legitimacy to the industry, which should provide enhanced access to custody, improve relationships with vendors and provide customers the confidence about the legal future of cannabis. Alongside the near-term prospects for rescheduling, we remain actively engaged in a collaborative effort with many industry peers to challenge the constitutionality of enforcing the Controlled Substances Act on state-regulated cannabis businesses. As expected, the government filed a motion to dismiss the case from the lower courts. While we think a trial at the lower court level is not likely, we continue to argue the case for that trial and are waiting for a decision in the spring. While we welcome the opportunity to argue our case in the lower courts, we continue to believe this is a Supreme Court-level decision. Although we recognize the extended time horizon of this legal journey, we remain committed to this key initiative. Transitioning from federal updates, we continue to see significant progress at the state level. We are pleased to note that Ohio voters endorsed the legalization of adult-use cannabis in November. Subsequent to the voter approval, Ohio legislatures have been debating the final rules and regulations, which we anticipate will be wrapped up shortly and continue to believe the commencement of adult-use operations in the second half of the year. Despite the ongoing refinement of the final bill, there is a potential opportunity to establish 3 new dispensaries supplementing our existing 5, an exciting prospect in a state that holds particular promise. Ohio is a core and important market to us, and we believe we will end up with significant retail penetration in a state with nearly 12 million people and a licensing framework that is similar to what we have seen in Illinois. Ohio is a purple state, and we expect significant opt-outs at the local level, but we are quite confident in our ability to use first-mover advantage to execute on well-located local dispensaries, which is one of our core competencies. Lastly, in terms of state regulatory updates, we are pleased to see Governor Shapiro of Pennsylvania set a clear mandate to state legislatures calling on them to expeditiously legislate an adult-use bill. We'll be following this closely, but are more optimistic than ever about the prospects of adult-use in the near term in Pennsylvania. We are excited to open 4 more dispensaries there, bringing us to a total of 6 in advance of the anticipated adult-use developments. In Pennsylvania, we believe we have an advantage in locating our dispensaries now focusing on locating our dispensaries in highly trafficked retail quarters while many of the early operators have much more limited location options. Let's move to Slide 5 to discuss Ascend-specific highlights. We remain excited about the management transition and what John and his team have accomplished and the team he has pulled together. I'm extremely pleased that we are becoming a more mature company, now entering the period in our growth journey to become a free cash flow generating company. 2023 was the first full year since the company's inception that we generated positive cash from operations and free cash flow. This puts us in a very strong position as we recently began active discussions to refinance our debt, which is due in August of 2025. These preliminary discussions have been positive, and we are satisfied with the market perception and early indications in regards to this effort. As Mark will describe in detail, we amended our federal tax returns and see a strong likelihood that we will be successful in obtaining the refunds. Several of our states are going through the expected maturation of the retail markets. In these states, we are working to: one, maximize our adjusting retail profitability; two, further penetrate the wholesale market; and three, build extensive retail partnerships. At the same time, we are in several states that are at the start of their adult-use journey. This diversification is important. In the past, limited diversification posted a risk as Illinois accounted for 100% of our EBITDA in 2021. Since then, we've significantly reduced the balance to less than 55%, thanks to the maturation of our businesses in other states. Moving forward, we are continuing our efforts to grow, and we remain disciplined in achieving scale in our core markets. We are focused on a higher return, lower risk growth and capital allocation strategy that emphasizes expansion of our existing markets and faster conversion to free cash flow generation. With that, I will turn it over to John to take you through specifics of the strategy and provide an update on the results in more detail beginning on Slide 7.

Thank you, Abner. It's been wonderful partnering with you and the Board over the past 10 months, and I'm thrilled by the results the team has generated this year. We have a lot to be proud of. We ended the prior year with just 24 operating dispensaries. And today, we have 35 with the next opening later this week. We have expanded our product penetration with the percentage of retail sales from products manufactured by AWH increasing from 44% in 2022 to 49% for the entire year 2023. Additionally, we more than doubled gross wholesale pounds sold compared to last year, leveraging the same asset footprint of cultivation facilities. We ended 2022 with 2 medical and 4 adult-use markets and ended 2023 with 1 medical market in Pennsylvania, 1 on the verge of starting adult-use in Ohio in 5 recreational markets. All of these notable achievements have helped to drive impressive financial results. Our full year net revenue for 2023 was $519 million, representing 28% growth compared to the prior year. This growth was driven by increases across both our retail and wholesale businesses. Our retail business was up 21% for the full year, led by the opening of 6 new stores and the acquisition of 4 stores in Maryland, which started adult-use sales in July. It was further boosted by the full year benefit of adult-use sales in New Jersey as well as meaningful increases across our third-party and intercompany wholesale business. This year, we had gross wholesale growth in all 6 markets where we have cultivation operations and third-party growth in all 3 of our key wholesale markets, Illinois, New Jersey and Massachusetts. This growth was driven by an annual increase in the number of third-party orders of 125%. Despite the midyear cultivation setback we experienced in Franklin, New Jersey, the expected pressure our Illinois business faced at the onset of recreational sales in neighboring Missouri, we were able to aggressively regain lost ground and deliver adjusted EBITDA exceeding expectations at approximately $107 million, representing 14% growth. Further to this, we meaningfully increased operating leverage for the year, decreasing SG&A as a percent of revenue from 33.8% in 2022 to 30.6% in 2023, representing a 320 basis point improvement. Let's move on to Slide 8 to discuss the retail business in more detail. I continue to be very optimistic about our strong retail footprint. This year, we were particularly pleased with some of our new stores, including 2 of our new outlet stores, New Bedford, Massachusetts and Tinley Park, Illinois. As previously mentioned, we opened 4 stores since the end of Q3, including our Cincinnati, Ohio store, which opened just after the start of the New Year. We are especially excited about the 3 new stores in Ohio, bringing our total presence in the state to 5. We are anticipating a sizable uplift when the state transitions to adult-use later in the year. We continue to boast some of the most productive stores in the nation, and I'm proud of the team for always working to refine and optimize our position. In Q4, retail revenue was 69% of our net revenue at $97 million. This was down 4% sequentially, largely led by declines in Illinois due to the expected seasonality and increased competition. However, these declines were partially offset by the 3 new store openings within the quarter and improvements in our Pennsylvania stores' performance. For the full year, our retail earnings totaled $371 million, reflecting a 21% increase compared to the prior year. This growth was fueled by the additional stores and the full year impact of adult-use sales in New Jersey. Looking ahead, we are actively pursuing opportunities to further penetrate our existing retail shelf space and market share. Specifically, in Illinois, we are pursuing unique partnerships with Social Equity and recently signed an agreement with the first Social Equity to open in Q4 of this year. Furthermore, we are employing similar constructs in other states. In New Jersey, for example, we have executed an agreement to partner with a Social Equity operator and plan to also support bringing this store to market in Q4. In addition to these creative partnership structures in New Jersey and Illinois, we own 4 more dispensary licenses that are in the process of being constructed in Pennsylvania, adding to the 2 dispensaries already in operation. Our third dispensary in Pennsylvania, located in the Pittsburgh suburb Monaca, will open this week. Lastly, in addition to the aforementioned retail expansion plans, we believe the adult-use regulations in Ohio will allow us potentially up to 3 additional stores. We are excited about what lies ahead for our retail business. Let's move to Slide 9 to discuss the wholesale business in more detail. Throughout the quarter and the entire year, our Wholesale division has consistently excelled. We've successfully set ourselves apart, making significant inroads into established markets such as Massachusetts and swiftly capturing market share in emerging markets like New Jersey. As the year concluded, AWH house brand secured the position as the fourth largest in Illinois, Massachusetts and New Jersey combined. Furthermore, Simply Herb claimed the #1 spot in Massachusetts and Ozone surged to the third position in New Jersey and maintained solid #3 standing in Illinois. Our brands continue to fuel the growth of our wholesale business. Our gross post sale revenue for the full year was up in all 6 of our wholesale markets and the number of third-party orders were up 125%. Q4 was our fourth quarter in a row with both gross and third-party wholesale sales growth. This is an extremely impressive achievement, especially given the market normalization occurring in several of our key states. For Q4, our net wholesale revenue was $43 million, up 7% compared to the prior quarter, driven by increases in New Jersey and Massachusetts. And for the full year, our net wholesale revenue was $147 million, up 47% compared to the prior year, led by third-party sales increases in New Jersey, Massachusetts and Illinois. In New Jersey and Illinois, we have over 90% market penetration and have been keeping pace establishing relationships with the new doors. In Massachusetts, we have gone from 0 to over 50% market penetration in a mature market in 2 years. I'm extremely proud of the team for delivering these results, which made up 28 a year. Looking ahead, we have opportunities for continued expansion in our existing footprint. For example, we have recently announced the signing of a definitive agreement to acquire a second cultivation facility and associated operations in Massachusetts. Once we complete additional minor upgrades, the facility will have 15,000 square feet of canopy. However, immediately following the signing, our team got to work and built out a state-of-the-art kitchen, which has already enabled us to launch new products into the market. The expansion of our cultivation and production capacity in the state is a direct correlation to the increasing demand for AWH's products, underscored by the resounding success of Simply Herb brand and the success of our 3 retail stores in the state. Being in a position to expand here is a true testament to how well our business is doing. This past year has been truly remarkable, and I look forward to continuing to deliver in the coming quarters. Next up, our newly appointed CFO, Mark Cassebaum, will provide a detailed view of the financials for the quarter and begin discussions of the 2024 full year outlook. Mark is only 3 months into his journey here at Ascend and we are pleased to have him on board. He comes to the company with extensive SG&A experience, which has gathered from several key omnichannel companies such as Ralph Lauren, UPS, Bed bath & Beyond and more. With that, I will turn it over to Mark to begin on Slide 11.

Appreciate it, John. Good morning to all. I'm delighted to be here. The initial 3 months in my role have been fulfilling as I have begun to familiarize myself with the business and started to pinpoint potential opportunities. I've already had the pleasure of meeting several of our supportive lenders and investors, and I eagerly anticipate connecting with the rest of you in the upcoming weeks. As highlighted by John, we are delighted with the strong finish to the year. Furthermore, we are proud to have achieved a significant milestone by generating positive cash from operations and positive free cash flow for the first full year since the company was founded. Total revenue for the full year amounted to $635 million, representing 30% year-over-year growth. While revenue net of intercompany sales, increased by 28% year-over-year to $519 million. Meanwhile, adjusted EBITDA for the full year increased 14% to $106.5 million. These record full year metrics were fueled by the performance in both the retail and wholesale businesses. John covered the main drivers on the full year, so let's shift to discuss the consolidated Q4 results in detail. Q4 was another great quarter driven by execution in the wholesale business. Net revenue was $140.2 million, which is largely flat compared to the prior quarter. This was driven by declines in Illinois retail being partially offset by wholesale growth in New Jersey and Massachusetts as well as the opening of 3 new stores within the quarter and strengthening of our Pennsylvania retail stores. In comparison to the prior year, net revenue for the quarter increased 25% due to the opening of 6 new retail dispensaries throughout the year, the acquisition of 4 dispensaries in Maryland and meaningful increases in intercompany and third-party wholesale sales compared to the prior year. In Q4, adjusted gross profit increased 7% to $60 million, with margins expanding 294 basis points to 42.9%. This expansion was driven by improvements in utilization and productivity in New Jersey and Massachusetts cultivation and production facilities, partially offset by margin declines in Illinois. Our adjusted EBITDA results were meaningfully above expectations, improving 10% compared to the prior quarter to $32.4 million. Meanwhile, margins improved 218 basis points sequentially to 23.1%. These sequential increases were driven by gross margin improvements, which were partially offset by the timing of certain expense accruals. Overall, we were pleased to deliver another strong quarter, demonstrating not only our commitment to excellence but also our dedication to achieving and surpassing our performance goals. Let's move on to Slide 12 to review cash flows and the balance sheet. In Q4, we generated approximately $17 million of cash from operations and $8.4 million in free cash flow, inclusive of $8.2 million in capital expenses related to dispensary builds and cultivation enhancements. We ended the year with $73 million of cash and equivalents, $236 million of net debt and $223 million of fully diluted shares outstanding. For the full year of 2023, we achieved a significant financial milestone by generating approximately $55 million in cash from operations and $30 million in free cash flow. This accomplishment marks the first time in our history that we generated positive cash flow. It's worth noting that these metrics do not include $21 million of benefits we received related to the employee retention tax credit. We're thrilled to reach this milestone and generate positive cash flow as we approach the refinancing of our term loan due in August of 2025. As Abner mentioned, we have taken a very proactive approach to this refinancing and our initial discussions with existing and new lenders has been productive, and we are pleased with the progress we are making. Moving to tax. We filed 2020, 2021 and 2022 amended federal tax returns. We plan to file 2023 federal return as a normal corporate taxpayer, excluding 280E. As a result of these amendments, we expect these refunds to cover our 2023 federal tax obligation. Looking ahead to 2024, we anticipate another year of meaningful free cash flow generation as we expect to spend approximately $35 million in CapEx to support the build-out of the existing pipeline. Consistent with prior years, we expect to see nominal sequential pressure from seasonality. However, this will offset the full quarter benefit of our new store openings, and we anticipate Q1 revenue to roughly be in line with Q4, with a mid-single-digit decline in sequential EBITDA. For the full year 2024, we are targeting double-digit growth in top and bottom line as we benefit from continued new store openings and expansion in our wholesale business. A portion of our strategic focus across the retail and wholesale businesses is to continue with the value-based offerings. As a result, we anticipate our 2024 gross margins to remain in line with 2023. However, we continue to scale and leverage the business to provide a modest increase in EBITDA margins. Before opening up to questions, I want to acknowledge the team for working hard to deliver industry-leading growth in 2023. I am excited to be here and look forward to continuing to deliver for our stakeholders in the coming quarters. With that, I will turn it over to the operator for Q&A.

[Operator Instructions]. Your first question comes from the line of Russell Stanley from Beacon Securities.

Around New Jersey, just wondering, I might have missed it earlier, but what is your current wholesale penetration now and more on that with respect to the new doors that have opened? Do you have insight as to how many wholesalers they are typically sourcing from? I'm just trying to understand where your share of shelf may be with those new doors coming online, given the retail only.

Russell, it's John Hartman. Russell, I'll just start by saying we're really pleased with our overall business in New Jersey, and I'll hone in on your question around wholesale. Our wholesale team has just done a remarkable job in establishing relationships early with the new dispensary operators, both multistate operators and social equity operators. And through those relationships have built a very strong penetration in the state. We're currently enjoying over 90% penetration in all the doors in New Jersey. So the team has done a terrific job of building those relationships, and that's rewarded us with a really terrific amount of shelf space in those stores.

Russell, it's Abner. I just want to say also that our brands are currently ranked #3 in New Jersey. So that gives us a sense of where we are. And we see 6 major players, with Curaleaf being #1.

Maybe just as a follow-up for a question around the Illinois retail. You called that out as a bit of a headwind in the quarter. I'm just wondering what you're seeing there now with respect to competitive pressure. One was the headwind all price in the quarter, did you see volume pressure as well? And are you seeing the pressure abate at all?

Well, so we've seen a little bit of pressure in New Jersey. However, the geography of our current store locations is such that as new licenses and new stores have opened in the middle part of the state and the southern part of the state, we've been not completely but largely isolated from the market densification. So we've seen just a slight decline in our retail sales in the state of New Jersey. It's been well balanced by our wholesale business in the state and the recovery of our cultivation and production facility as well in New Jersey. And as Abner pointed out a moment ago, the penetration of our brands in the state of New Jersey has been terrific.

Your next question comes from the line of Andrew Semple from Echelon.

Congrats on the Q4 results. First off, I just want to ask about the rapid ascent of Simply Herb in Massachusetts. About 5 to 6 quarters ago, I recall that Massachusetts wholesale had been lagging expectations. So very pleased to see the sharp turnaround in the state. Maybe you can comment on what you've done differently in that market to gain market share in a very competitive state and whether there are any learnings there that you'd be able to take to other states as more wholesale and adult-use market opportunities open up?

I think I'd point to 3 particular things and you named the first one, and it's a quality product. So I think our brands have become known for a terrific product at a value price, comparatively speaking. And Simply Herb has done a -- is just seeing a great run in the state of Massachusetts and other places. But in Massachusetts, we went from really a dead stop, 0% penetration to terrific penetration in the state, and we've achieved the #1 brand with Simply Herb state. The second thing I would point to is the balance of our mainline stores and our outlet model. We've got 3 great stores currently in Massachusetts and 1 of the 3 is our outlet model, and it's the strongest performing store in the state of Massachusetts and New Bedford. And then the third thing I'd point to is it's just the overall growth of the wholesale business in Massachusetts. The team has done a terrific job as we just discussed on the previous question in New Jersey, the wholesale team has done a terrific job of establishing early relationships with dispensary operators, both large and small, and in building out our wholesale portfolio in the state. So it's a blend of great product at a great price for us, a mix of 2 mainline stores in a highly productive outlet store and the strength of the overall wholesale business and our portfolio of products that we're selling to our third-party customers.

Andrew, this is Abner. I just want to say like, having been at this a while, I'm particularly pleased about the mass performance, as you suggest. We were really struggling a few years ago, both on a quality and a distribution basis. And it's a real testament to the team and the work John is doing that we've been able to continue and grow this to the point where we are. I think the lessons which you pointed out are critical. Quality for price is the name of the game here. We effectively brought in better quality product at a lower price in Simply Herb, and we did it in some large-format characteristics and packaging, and it's just been very, very successful. We took some of the lessons that we saw from the price reductions in Michigan and felt that they were coming to Massachusetts and got ahead of it. A number of our competitors chose to take capacity offline and reduce their presence. We leaned into it. We also think we're committed to making a delivery every week in a very friendly manner to each of our customers as well as looking to get additional penetration in the shelf. So we think that quality and service like any business can win. And just because the business is -- a state is mature, does not mean there isn't an opportunity for a really focused wholesale strategy to continue to gain share.

That's helpful. And then maybe just with the acquisition also announced in Massachusetts, obviously, pleased to see that given the momentum in the market. What would be the expectations for that new capacity hitting shelves in the market? What quarter in 2024 are you looking at in terms of the time line? And would the intent be to continue leaning into Simply Herb with that additional production capacity? Or would you be looking at broadening out your brand portfolio in the state?

First, I'll just start with the thesis of the investment. As you've heard us talk about over the last several quarters, a really intense focus on capital allocation. And this is a perfect example on the wholesale side of the business of how we're thinking about capital allocation. Then actually, wholesale generically, so cultivation and production/wholesale. Relatively low-dollar investment, we were able to acquire an existing facility from a former operator at a very, very effective price and then rapidly deploy that asset. So as I've said in my prepared comments, we're incredibly proud of how quickly our team has mobilized to operationalize that facility. And in less than 90 days, they've built out and had fully operational and professional kitchen in the building. As you may know, our own branded gummies, for example, is a form factor that we haven't had in our portfolio of products in the state of Massachusetts and we're really pleased to say that as we sit here today, just roughly 3 months later, the facility is producing Ozone-branded gummies for the Massachusetts marketplace, and they'll be out very shortly in our stores and in our partner stores. The product side of your question, this facility will support the full portfolio of our products, so Ozone, Simply Herb and others. As it ramps up, our initial focus was, as I mentioned, on the kitchen production in gummies, but we have our first several rooms planted and have products already growing in the facility for second quarter harvest. And we will leverage both our existing Athol facility, which is a terrific facility and operating at a very high level of proficiency and we'll meld in this additional canopy, 15,000 additional square feet of canopy and the kitchen production to be able to, even in a strong way, support our 3 stores and our partner stores in the market.

I also think this is indicative of a new phase of the industry. We're seeing, in particularly in the mature markets, excess capacity on the wholesale and retail side with some retail stores struggling. We think there's a tremendous opportunity we're seeing for distressed purchases, partnerships and other types of opportunities that can come in at a significant discount to invested capital and also turnaround in some stores that maybe haven't been operating to the best of their abilities. And we think certainly a way to win in this industry is through those purchases and that growth, and that's an area that we're focused on aggressively as a company.

Your next question comes from the line of Frederico Gomes from ATB Capital Markets.

You mentioned an increase in your Pennsylvania stores. Could you comment what's driving that, whether it's specific to your stores or an improvement in the overall market there? And what's your outlook for the year in that state?

First off, I'll start with just we're very bullish on the Pennsylvania market. We have 2 existing stores in the market and our third store in the market is actually opening today in Monaca, as I mentioned, in a suburb of Pittsburgh. And we have 4 additional stores in the pipeline in the state of Pennsylvania that are coming later this year. So as one of our 2 final medical markets, we can talk separately about Ohio, with Ohio on the cusp of becoming adult-use, Pennsylvania is our remaining medical market and excited to hear the governor's comments over the last several months of his desire to rapidly move towards adult-use in the state of Pennsylvania. What we're seeing with our existing stores is just the terrific acceptance by the customers in Pennsylvania, both the Scranton area and the Northeastern burbs of Pennsylvania Philadelphia, where our 2 stores are today of the outlet model. And we're seeing a very strong reception to our products, which are terrific quality at a value price, and we expect that to continue. So overall, product, price, satisfying the customers' needs, the placement of, I think, our first few stores in great locations. As I mentioned, our third store in the state opening today. We're also very excited about that. That location in the Western part of the state, so it's our first store in the Western part of the state, and we're optimistic about the time line for adult-use of the state as we bring on more assets.

And then just on the amended tax filings that you mentioned, just to clarify, are you expecting to get any refunds from that in terms of actual cash? Or is it impacting your tax payments going forward only?

This is Mark. Yes, we are expecting to have a refund that we will look to put towards our '23 federal obligations. So we're still working through that as far as '23 and '24. But yes, we do expect that.

Your next question comes from the line of Matt McGinley from Needham.

So my first question is on the margin outlook and how important Illinois is to drive margins slightly higher as you noted in the outlook. I think Illinois is still roughly half your revenue. And as you showed in the presentation, I think it's a little bit more than half of your operating profit. Do you expect Illinois to be relatively steady in terms of revenue compared to what you saw in the fourth quarter? And if Illinois continues to slip, do you still have enough coming from these other states that you can still improve margins? Or is the outlook for margin improvement really contingent upon something stable or something happening in Illinois that may not have been what you saw last year?

Let's just revisit. We just opened our 10th dispensary in Illinois in December. So we're at the regulatory cap currently with our new Northlake store. We've seen a substantial leveling out of the impact in Southern Illinois from the go-live of adult-use in Missouri last year, which has been a positive. We have a terrific balance of retail and wholesale in the state of Illinois. As we talked about in both New Jersey and Massachusetts, our wholesale team has done an equally stellar job of building out our wholesale business in the state of Illinois. And it's a very nice complementary portion of business to our retail. And then, as you saw in the slides, the business has quarter-over-quarter, year-over-year for the last several years, diversified away from the market in Illinois. It's an incredibly important market to us. It's an incredibly strong and profitable market for us, and it will continue to be. But as you see the build-out and the maturity of the assets in our 6 other states coming online and ramping up, you see a very nice diversification away from the business. So effectively, the business is derisking Illinois. But coming full circle back around to Illinois, when we think about market normalization, there's 3 things in our mind. One is maximize our existing retail footprint, and that's exactly what we're doing. So we're at the 10 cap currently, where we continue to pump fantastic products through our cultivation and production facility in Barry, Illinois to all of our stores in the state. And as Abner mentioned, you can see that we've achieved the third position with our Ozone brand in the state of Illinois, which we're proud of. The second is to continue to penetrate from a wholesale perspective. And as I mentioned, our wholesale team has done a terrific job in the state of Illinois. Similar to New Jersey, we're in over 90% of the doors in the state of Illinois, and we continue to nurture those new operator relationships and gain shelf space in those stores along with our GSO partner stores. And then finally, as mentioned in our prepared remarks, we're intensely focused on further opportunities to densify these markets, and Illinois is a key example. So through partnerships, through these business relationship structures, we have identified the opportunities to partner with social equity operators, provide them a great deal of support to operate their store in exchange for a substantial shelf-space commitment as well as the ability to garner some significant financial benefits from the relationship. So when we think about as these markets mature, the ability to maximize retail with our great product and great service, continue to penetrate from a wholesale perspective and then densify the market through these social equity partnerships.

And also, if you remember back in '21, when this was 100% of our EBITDA, the concerns in the marketplace were, oh, Missouri's coming, Ascend is totally focused on Illinois, it's going to lead to degradation of their overall business. And that has 100% not been the case. We've been able to grow this business at double digits despite double-digit declines in Illinois. We continue to see that to be the situation today. We're expecting double-digit increases in the business and a modest decline in Illinois. So we faced the headwinds of Missouri, just fine. We're in a great situation. We love Illinois and the profit contribution, but we've got growth drivers elsewhere and continue to see double-digit growth without growth in Illinois.

My second question is on the cash flow. How much of the $15 million in operating cash flow is driven by a higher taxes payable balance? And excluding the impacts you talked about on 280E refunds and any deferred 280E related payments, do you still expect to be operating cash flow positive into 2024?

It's Mark. I just want to make sure I heard it correctly. Can you just restate the first part of that question, please?

You did roughly $16 million in operating cash flow in the fourth quarter. How much of that was driven by tax benefits?

So what I would say, we did see an increase in tax payable. Again, we have another quarter of increase, which is essentially our 280E as well as some reclassification on our tax strategy and stance. What I would say for the second part of that question and what we expect, yes, we absolutely are planning and our plans are going to be to have positive cash from operations as well as positive free cash flow by the end of '24. So we're sticking to what we're seeing and keeping the momentum going.

And your next question comes from the line of Ty Collin from Eight Capital.

John, I wanted to maybe follow up on the commentary you just gave around the social equity partnerships. Just wondering if you could expand on that opportunity a little bit, maybe help us size up how much of a growth driver that can be for you guys? And maybe also help us understand what the economics of those arrangements typically look like maybe vis-a-vis your normal margin structure and including what investment or work goes into those partnerships from your end?

So, I think I'll use New Jersey as an example, where by regulation, we can take a 35% minority ownership position in additional dispensaries in support of social equity operators. And I think based on that, we are actively pursuing those types of relationships. And we're going to have a lot more to say about that in the coming quarters.

I would say that these stores are consistent with other stores in the states. So with Illinois, you've got stores, we're at the high end of $6 million to $12 million stores, in New Jersey, they're higher, $10 million to $15 million stores. New Jersey is working on changing the regulations that would allow us to take an equity interest in another 7 stores. And in Illinois, we see a substantial opportunity to densify through these partnerships. We're still working through, as John suggested, exactly what percent of the economics and how that's going to flow through to our income statement. But we think it's going to be a material growth driver that's not in current people's projections or in our projections, and we're going to work with you guys over the next few months with some announcements and through conversations to help model that. But it is something that we don't think is in models or in our expectations that we think can be an additional growth driver.

That's really helpful color there. And then for my follow-up, just a bit of a clarification on the cash flow guidance. So you mentioned that you'll be filing, I think your '23 and I assume your 2024 returns, as a normal tax filer. So does the guidance around operating cash flow and free cash flow include not paying the 280E component of your taxes this year?

So, just to restate where we are, Ty. So we have filed amended 2020, 2021 and '22 tax returns. Those expected refunds from those returns will cover our 2023 tax obligation and then a little bit. And on a go-forward basis, we are paying our 2024 estimated federal non-280E taxes each quarter. So that's just a summary of our overall tax position.

And there are no further questions at this time. I would like to turn it back to back to Rebecca Koar for closing comments.

Thanks, everyone, for joining today. Feel free to reach out to [email protected] if you have further questions. Thanks again.

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.