TerrAscend Corp. (TSND) Earnings Call Transcript & Summary

Good afternoon. My name is John, and I'll be your conference operator today. At this time, I would like to welcome everyone to TerrAscend's First Quarter 2025 Financial Results Conference Call. Joining us today is Jason Wild, Executive Chairman; Ziad Ghanem, President and Chief Executive Officer; and Keith Stauffer, Chief Financial Officer. Our remarks today include forward-looking statements, including statements with respect to the company's outlook, including the company's expected financial results for the second quarter of 2025 and statements and assumptions relating thereto the company's ongoing cost reduction efforts and productivity gains; and the company's expectations regarding its market opportunities, Midwest expansion and M&A strategy; the expectations regarding regulatory reform and the potential benefits thereof. Each forward-looking statements discussed in today's call is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements and reported results should not be considered as an indication of future performance. Additional information regarding these factors appears under the heading Risk Factors in the company's Form 10-K with the Securities and Exchange Commission or the SEC and subsequent SEC filings, which are available at www.sec.gov on SEDAR+ and the company's website at www.terrascend.com. The forward-looking statements in this call speak only of today's date, and the company undertakes no obligation to update or revise any of these statements. During today's call, the company will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release and our quarterly report on Form 10-Q from the quarter ended March 31, 2025, which you can find on the company's Investor Relations website or on the SEC and SEDAR+ website. I would now like to introduce Mr. Jason Wild. Please go ahead, Mr. Wild.

Good evening, everyone, and thank you for joining us. Despite a challenging industry environment, revenue performed in line with our guidance, while gross margin and EBITDA margin outperformed our expectations during the first quarter of 2025. While first quarter revenue totaled $71 million, a 4.5% decrease sequentially as expected largely due to seasonality, gross profit margin expanded to 51.8%, a 160 basis point improvement sequentially. We continue to generate productivity gains and cost reductions in our business. Over the past year, our gross profit margin has steadily increased each quarter from 48% in Q1 of '24 to 51.8% in Q1 of '25. G&A expenses decreased by an additional $1.6 million in Q1 following a $3.6 million reduction in Q4 of 2024, reflecting ongoing G&A reduction efforts to reduce G&A by $10 million year-over-year in 2025. As a result of these efforts, in the first quarter, we generated adjusted EBITDA of $15.3 million, positive operating cash flow of $8 million and positive free cash flow of $5.5 million. This marks our 11th consecutive quarter of positive operating cash flow and our seventh consecutive quarter of positive free cash flow. Key drivers of this performance have been our growth and margin expansion in the Northeast. In addition to driving the performance of our existing business, we have been focused on the aggressive pursuit of M&A. For several quarters, we have highlighted bolt-on acquisition opportunities and possible transformational deals that we are actively pursuing. We believe that TerrAscend's targeted approach has put us in a differentiated position to invest in the best geographies and assets at attractive valuations, while others are capped in many of the most attractive states and have turned their focus inward. During Q4 '24, we announced the signing of a definitive agreement to enter Ohio, our sixth U.S. state with the acquisition of Ratio Cannabis, a well-situated and profitable dispensary. We closed on our Ratio this week and are fully integrating this dispensary into our existing operations. Our goal in Ohio is to assemble a leading retail footprint by acquiring high-quality stores at the right price, just as we did in Maryland. This will allow us to leverage our existing infrastructure and SG&A to drive higher profitability. In New Jersey, we have expressed our interest in expanding our retail footprint in order to extend our leadership position. Earlier this week, we announced a definitive agreement to purchase Union Chill dispensary, which will bring our total number of dispensaries in the state to 4, subject to regulatory approval. Union Chill is a strong performer, generating more than $11 million in annualized revenue. Upon closing, this deal will be immediately accretive to EBITDA and cash flow. We plan to vertically integrate as soon as possible, which will further enhance margins, provide our full array of state-leading products and brands to local consumers and enhance our leading market share position in the state. We are evaluating multiple additional opportunities in New Jersey and have a robust pipeline, which we continue to work through in a disciplined manner. As we sit today and based upon our discussions, we anticipate that by the end of 2025, we will sign multiple additional transactions in the state. On the topic of regulatory reform, we are closely monitoring the developments at both the federal and state levels. The federal regulatory environment seems to be showing some signs of positive movement. But as we've mentioned many times, we have operated and will continue to operate our business independent of reform. In Pennsylvania, we continue to see progress related to the possible passage of an adult-use bill. We support the introduction of this bill as it marks the first milestone towards adult-use approval. We will continue to work closely with the legislators across both aisles to refine the bill to its end state. When adult-use occurs, we will be prepared to meet the increase in demand as we were in New Jersey and Maryland. Additionally, as previously mentioned, in December, oral arguments were held at the U.S. Court of Appeals for the First Circuit in the David Boies lawsuit against U.S. Attorney General, Merrick Garland, which seeks equal treatment for legal, state-regulated cannabis businesses. We look forward to sharing further updates as they become available. In summary, as I've said before, the cannabis industry is still in the early stages of its development. While TerrAscend has only been operating in the U.S. for about 6 years, our company has made significant progress in many facets of our business. For anyone who has been following the cannabis industry for the last few years, it's obvious that the pain of the capital markets has spared no one. However, I would like to highlight where I believe TerrAscend is differentiated. Number one, we have a pathway to growth organically and through M&A due to our deep presence in our existing markets and a wide open map for further expansion. Two, we have demonstrated consistent delivery of positive free cash flow for 7 consecutive quarters. Three, we have demonstrated operating efficiency by expanding gross margins by 380 basis points over the last 5 quarters while reducing operating expenses. Four, we refinanced the majority of our debt clearing the way through 2028. Five, we own $150 million of our own real estate and have no material sale-leaseback obligations. And finally, last but not least, we have a capable management team that has been in place working together for several years now. In August of last year, we announced our first ever share repurchase program for up to $10 million worth of stock. Considering the improved performance of our existing business, strength in the balance sheet, $150 million of own real estate with no material sale leasebacks, approximately $30 million in cash, the potential for Pennsylvania to convert to adult-use and multiple attractive acquisition opportunities, we believe that our equity is significantly undervalued. In March, we repurchased our shares during the 15-day open trading window and within the daily purchase restriction limits. We will continue executing on this buyback program while balancing this with other capital allocation priorities, including growth CapEx investments in both Maryland and New Jersey as well as further acquisitions. With that, I'll now turn the call over to Ziad to provide an update across our key markets. Ziad?

Thank you, Jason, and hello, everyone. Let me walk you through our performance in each of our key markets this quarter, beginning with New Jersey. In the first quarter of 2025, we maintained a leadership position in the state according to BDSA. Our retail revenue while down sequentially, mainly due to seasonality, remained healthy in the state despite new retail door openings in close proximity to our stores. According to Lit Alerts, an independent market measurement source, all 3 of our Apothecarium retail locations in New Jersey ranked in the top 10 out of over 200 dispensaries now open across the state in terms of total units sold during the first quarter. While wholesale revenue declined quarter-over-quarter in New Jersey, our core metrics remain healthy. Penetration rate and average order size remained stable while we continue to have a leading market share position and are selling to an increasing number of doors across the state. The quality and consumer appeal of our brands is driving this leading market position with our brands ranking among the top 3 in flower, vapes, edibles and concentrates categories. Quarter-over-quarter, sales trends remain positive in virtually all categories with the fastest growth and market share gains in extracts and edibles. Our extensive product portfolio in these categories continues to attract consumers as we deliver strong value and performance across multiple price tiers. Earlier this week, we executed a definitive agreement to increase our store count in New Jersey to 4 with the acquisition of Union Chill, a high-performing dispensary generating annualized revenue of over $11 million. Upon closing, we expect to quickly integrate this location into our operations and vertically integrate in order to efficiently capture the full synergies of this opportunity. Longer term, our goal is to acquire up to 6 additional dispensaries, expanding our retail footprint to 10 in the state. This retail expansion would further increase our leadership in New Jersey, give us additional scale and lead to improved margins and profitability as we vertically integrate each new store. Expansion of our cultivation and manufacturing capabilities at our Boonton facility is well underway and proceeding according to plan. This expansion will provide us with additional flower capacity and the ability to offer a broader product portfolio as well as enable us to supply additional stores. The edibles manufacturing expansion is now nearly complete, while we expect to complete the cultivation expansion part of the project in the third quarter. Turning to Maryland. Our success story continues in this state. As a reminder, we entered the Maryland market in 2021 through the acquisition of a small cultivation facility with negligible revenue and then acquired 4 dispensaries during the first half of 2023. We further strengthened our market share in the quarter, increasing our share from 5.2% to 5.9% and are now only 1.4 market share points away from the #2 position in the state. We are laser-focused on achieving this goal over the course of this year. Drilling a bit deeper, we gained significant market share in the quarter across all 5 product categories: flower, vapes, edibles, extracts and pre-rolls. In the quarter, we improved to a virtual tie for the #3 market share position in the flower category. In edibles, we now hold the #6 position with the top 3 players all having lost market share in the quarter. In extracts, we grew 19% quarter-over-quarter and in pre-rolls, we grew 22%. During the first quarter of 2025, despite seasonality, retail revenue increased slightly quarter-over-quarter, while wholesale revenue increased by almost 9%. Total revenue in Maryland across both channels increased sequentially for the fifth consecutive quarter to an annual run rate of nearly $75 million. Our verticality and increased additional efficiencies have allowed us to expand our gross margin from 25% in 2023 to the high 50s in the first quarter of 2025. Remember, all of this progress is despite having just entered the Maryland market upon adult-use conversion less than 2 years ago. To meet the consumer demand and expected growth, we expanded cultivation capacity by an additional 50% at our Maryland facility. We expect our first harvest in June. In Pennsylvania, with the backdrop of a mature medical market, we continue to build strong momentum driven by innovation, the strength of our brand and our team's in-market execution. During the quarter, we were the fastest share gainer in the state. We increased our market share by 38% quarter-over-quarter to a #7 position according to BDSA. This is an extremely strong showing considering several of the other leaders in the state operate 3x more dispensaries than TerrAscend. During the quarter, our market share increased to 5.1% as compared to 3.7% in the fourth quarter of 2024. We have strong momentum and are less than 1 share point away from a top 5 position in the state. We already hold top 3 position in both the extracts and tincture categories. We also hold a #5 position in edibles with strong momentum to move into a top 3 position driven by innovation behind our Valhalla brand. Retail revenue was steady sequentially as productivity per store continues to be healthy. Wholesale revenue increased 9% quarter-over-quarter, driven by demand of our value-oriented Legend brand and our expansion into the edibles category earlier in 2024 with our Valhalla brand. As many of you know, we have a fully built-out large-scale cultivation and manufacturing facility in Pennsylvania with no need for additional investment. As the prospect of adult-use launch becomes greater, we have plans in place to bring on currently unused capacity and we'll have it ready as needed in response to the increased demand resulting from adult-use implementation. And lastly, in Michigan, our priorities remain to improve operational efficiency and drive gross margin. Earlier this week, we announced our entry into Ohio with the acquisition of Ratio Cannabis. Our goal in Ohio is to assemble a leading retail footprint by acquiring high-quality stores at the right price just as we did in Maryland. This will allow us to leverage our existing infrastructure and SG&A to drive higher profitability. In closing, we continue to make solid progress in the first quarter of 2025. Our business has remained steady due to our strong leadership team and dedicated workforce, robust business fundamentals, a targeted M&A strategy, no material debt maturing for the next several years, consistent positive operating and free cash flow quarter after quarter and best-in-class sponsorship. Based on all of this, I remain confident in our outlook for the rest of 2025 and the future. I would now like to turn the call over to Keith to provide a financial update.

Thanks, Ziad. Good afternoon, everyone. The results that I'll be going over today have already been filed on both SEDAR+ and with the SEC, and all results that I will reference today are stated in U.S. dollars. Net revenue for the first quarter of 2025 totaled $71 million, a 4.5% decrease sequentially as expected, largely due to seasonality compared to $74.4 million in the fourth quarter of 2024. Retail revenue decreased 6.4% sequentially and wholesale revenue was flat. Pennsylvania and Maryland retail sales were flat to slightly up sequentially, while seasonal declines occurred in Michigan and New Jersey. In wholesale, sequential growth in Pennsylvania and Maryland was offset by a decline in New Jersey. Gross profit margin for the first quarter was 51.8% compared to 50.2% in the fourth quarter of 2024 and 48% in the first quarter of 2024. The quarter-over-quarter 160 basis point expansion was driven by improvements in Maryland, Pennsylvania and Michigan, while New Jersey remained relatively flat quarter-over-quarter. While discussing gross margin progress, I would also like to take a moment to discuss the tariff climate as it relates to our business. Being a U.S.-based cultivator and manufacturer, only 6% of our input costs are derived from procuring select packaging and vape hardware from outside of the U.S. We have been proactively evaluating our sourcing strategies for several months as they relate to these materials, and we expect any continued tariff dynamics to have an immaterial impact on our business. G&A expenses for the first quarter were $26.4 million compared to $28 million in the fourth quarter of 2024. G&A expenses decreased by an additional $1.6 million in the first quarter, following a $3.6 million reduction in the fourth quarter. This continued G&A expense reduction over the past 2 quarters reflects our ongoing initiatives to optimize G&A, which we expect to reduce by $10 million year-over-year in 2025. GAAP net loss for the first quarter of 2025 was $12.3 million compared to a net loss of $30.2 million in the fourth quarter. Adjusted EBITDA for the first quarter was $15.3 million or 21.6% of revenue compared to $15.1 million or 20.3% of revenue in the fourth quarter. The sequential improvement in adjusted EBITDA margin was primarily driven by gross margin expansion and lower G&A expenses. Turning to the balance sheet and cash flow. Cash and cash equivalents were $29.4 million as of March 31, 2025, compared to $26.4 million as of December 31, 2024. Cash flow from operations in the first quarter was $8 million compared to $9.7 million in the fourth quarter of 2024. This represented our 11th consecutive quarter of positive cash flow from operations. CapEx spending was $2.5 million in the first quarter, mainly related to expansions at our Maryland and New Jersey facilities. The 50% expansion of cultivation in Maryland was completed in April with first harvest expected in June. Also, the expanded edibles production in New Jersey was completed in early May. The final project, which is still underway, is an enhancement of our greenhouse cultivation at our New Jersey facility. This portion of the project is expected to be completed in the third quarter of this year. Free cash flow was $5.5 million in the first quarter compared to $5 million in the fourth quarter of 2024, representing our seventh consecutive quarter of positive free cash flow. During the quarter, we distributed $700,000 to our New Jersey minority partners and paid down $1 million of debt. In August of last year, we announced our first-ever share repurchase program for up to $10 million, demonstrating our confidence in TerrAscend's future and our commitment to enhancing shareholder value. In March, we repurchased our shares during the 15-day open trading window and within the daily purchase restriction limits. We will continue executing on this share repurchase program while balancing this with other capital allocation priorities, including growth CapEx investments in both Maryland and New Jersey as well as attractive acquisition opportunities. Looking ahead into the second quarter, we anticipate revenue to be flat to up low single digits sequentially, gross margin to continue around 50% and further G&A expense reduction quarter-over-quarter as we continue to realize the savings from our ongoing initiatives, which we expect to generate $10 million in savings for the full year 2025. In summary, our first quarter results reflect another period of steady revenue performance that was in line with our expectations, gross profit margin higher than we anticipated and continued G&A expense reduction quarter-over-quarter. Driven by strong gross margin performance and lower G&A, we outperformed our expectations in adjusted EBITDA margin. In addition, we have now delivered our 11th consecutive quarter of positive cash flow from operations and our seventh consecutive quarter of positive free cash flow. We look forward to sharing our continued progress on the business during our next quarterly call. This concludes our prepared remarks, and I'd now like to turn it over to the operator to start questions.

[Operator Instructions] We now have our first question, and this comes from Frederico Gomes from ATB Capital Markets.

Congrats on the great margins there for the quarter. First question on Ohio, you closed the acquisition there this week but you announced it originally last year. So just curious, has anything changed in that market in terms of valuations since you announced the acquisition last year. And are you maybe seeing better deals today than you were back in November?

Fred, thanks for the question and for the confidence here. Ohio, we had Zach in Ohio today meeting the team and checking on them and telling them about TerrAscend and our culture. We have monitored that store throughout the process all the way to closing. We're still happy with the performance of the store. The store continues to perform extremely strongly and is gaining momentum. We will bring more benefit to the store. We -- so as far as other deals, we're still looking for the right acquisition at the right price in the right area in order to accomplish the accretion that we will accomplish with this store, both on EBITDA level and cash flow.

And then second question, just on Michigan. You mentioned that your gross margin improved in Michigan. We know that it's a very -- one of the most challenging markets in the U.S. We see a lot of price compression. So I'm just curious what drove that improvement. And your plans for Michigan, I know that in the past, you talked about scaling up operations in the state maybe through M&A. So I'm just curious if that's still the plan.

Fred, it's Keith. We've just been very focused for a while now on continuing to plug away and improve our cost structure. And so -- and that's ebbed and flowed over the quarters. We've had some quarters where we've stepped back a little bit in gross margin. Q4 to Q1, we happen to take a step forward and realized some cost reductions, which drove the gross margin in Q1. So really, it kind of ebbs and flows, and we've been oscillating in and around in the 30s -- kind of mid-30s, sometimes up high 30s and sometimes low 30s. And we just -- our focus remains continuing to both on the cost of goods side and on the operating expense side really just optimize that business. And it's been challenging, quite frankly. It's been challenging, but that's been our focus. And we're not quite ready to say we would expand until we have a better level of confidence that we have that we're on solid ground.

And the next question comes from Andrew Semple from Benson Financial.

Congrats on the Q1 results here. Just first question on the gross margin profile in the business. Do you think you can hold on to some of the gross margin profiles you've seen in Q1 for the balance of the year? Keith, I know you're just saying that there's some ebbs and flows to some certain business segments. So on the consolidated level, how are you feeling about holding on to some of those gains that we saw in the Q1 period?

Yes, Andrew, that's a great question. We -- first of all, we're really happy with the progress we've made over the last 5 quarters now. We started 2024 at 48% gross margin. And for 5 consecutive quarters, we've increased that number. It really kind of comes down to -- it's really multifaceted. We have our state lineup. Maryland, first and foremost, has really been the driver. We've highlighted that we've improved our gross margins in Maryland from the 20s when we started out there, and now we're in the high 50s. So we're really proud of that performance and everything the team has done there. And there are really multiple drivers there. We started at 0 verticality when we acquired the 4 dispensaries, and now we're up to sort of our ideal levels of 50% to 60% verticality. So that clearly drives gross margin. We've expanded the utilization at our facility. And like we said on the call here, we added the 4 additional grow rooms and 50% capacity. So as we absorb more fixed costs in that facility that drives our margin as well. PA, we've improved. And so we have various layers of improvement there. And then to your question, I can't promise that we can sustain 51.8%. We're really happy with the 51.8% in Q1. We do feel like with the mix of the states and the dynamics and all of our initiatives ongoing that we should be able to stay in that plus or minus 50% range. And again, that could vary by quarter, but that's kind of our outlook for the rest of the year here.

Great. Good to hear. And then maybe just on capital allocation. Just was looking for some commentary. hoping you can explain how you intend to balance share repurchases versus acquisition and some consolidation opportunities you have in front of you. If you could share how you prioritize between those 2 capital allocation opportunities.

Yes. Andrew, Keith again, I'll take that, and Jason might want to add in. So we do have some CapEx projects that we're completing, like we mentioned. So the 4 rooms in Maryland is largely complete. We still have some payments that need to be made against that. The edibles area in New Jersey that Ziad mentioned is almost complete as well with still some payments to be made there. And then the third CapEx project is the greenhouse enhancement in New Jersey. So there's about $10 million or so of CapEx projects that we have budgeted in the cash forecast. And then we have ongoing M&A activity that may, in some cases, require some cash. So we have to make sure we have that allocated for as well. And then we do have our share buyback program, and we kind of picked up the pace there in the 15 trading days of March, like Jason and I both said in our prepared remarks and are prepared to continue to even possibly further pick up the pace there in the buyback, especially given how things have been trending in the stock price. Jason, I don't know anything to add to that?

No, I think that's right. I mean we're trading -- we've got $180 million in cash and real estate. And the company, I think, as of the close, had under $145 million market cap. So we think that our stock is very compelling at this point. And we only have a short period that we could buy in the last month of last quarter, but we'll have a larger open trading window this quarter and definitely are going to execute on it.

[Operator Instructions]. And the next question comes from Yewon Kang from Canaccord Genuity.

This is Yewon King on behalf of Matt Bottomley. So my first question is about the brand strength that you're seeing across your operational footprint. Obviously, the market is becoming more commoditized and saturated every day. And so just wanted to ask how have you differentiated your brands to stand out in front of the customer base? And if you could speak to specific elements like pricing strategy, product quality or any unique marketing strategies that you guys have embarked on that have helped your case here?

Yewon Kang, this is Ziad. Thank you for the question. Over the last few years, we have focused our efforts from seed to sales on multiple initiatives that will result at the end to give better quality and better brands to our consumers based -- both in our own retail and at wholesale. On the COGS side, we have improved our strain selections. We have maintained our brand standard, and we have really developed a very strong supply chain that is governed by an ERP that will allow us to plan way in advance what the need of the consumer is and also will allow us to represent our brand and really target and segment our customers without having blind discounts. This is one of the reasons where our gross margin maintained for the last 5 quarters the way we've seen. We've also -- through our brands, we're able to acquire and retain customers and reduce their visits to the dispensaries. By putting better quality and bigger packages, we reduced the trips of our consumer, therefore, decreasing the poly shopping from different dispensaries, and we're seeing that in our VIP customers. So all this has really resulted in the retention and the acquisition that we've seen and has really helped our gross margin. The consumers continue to tell us they want the best quality at the best value with innovation and good speedy service. And I'm so proud of the team because our quality continues to tell the story. The value of this quality is great and the innovation and putting new products to attract and maintain those customers has been great. So -- and we've shared actually in my prepared remarks in Maryland, for example, the market share that we are winning is driven by the brand and by the quality.

Got it. And if I could just add one more. So it's more regarding your capital allocation plan and growth strategy going forward. So amidst your M&A conversations, I'm curious if you guys have ever pondered on the opportunity to enter the hemp-derived space just because it's been a topical initiative for a lot of the peers in the space. So yes, I wanted to ask how you guys are thinking about that market today and if there's any runway for you guys to enter anytime soon.

Yes, Yewon Kang, on hemp, we continue to watch very closely. We've done a comprehensive review to understand that industry better, to understand the fragmentation of this industry. We cannot really assess the impact of hemp on our businesses because the states that we are in are not as impacted as states like Texas and Florida. We acknowledge the size of the market. We also recognize the possible risks if the regulation change as it relates to the Farm Bill. So we continue to watch and evaluate different entry strategies, whether we enter at the farm level, at the co-packing level, et cetera, et cetera. We feel like we have ample expansion and growth opportunity within our -- opportunities within our own core business where we can best allocate our capital and resources versus doing it in hemp today.

[Operator Instructions] And no further questions at this time. I will hand the call over back to Jason Wild for closing remarks. Please go ahead, sir.

Thank you, everyone, for attending today's call. We will see you again in August. And for the TerrAscend team, I just wanted to say thank you to all of you from the budtenders to our cultivation team all the way to the executive team. Because of your relentless effort and passion, TerrAscend will continue to get stronger, and we will be there to write the mid and later chapters in the story of this industry. Thank you.

Thank you. This concludes our conference call for today. Thank you all for participating. You may now disconnect.