The Cannabist Company Holdings Inc. (CBSTQ) Earnings Call Transcript & Summary

Good morning, and thank you for standing by. Welcome to the Columbia Care Business Update Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lee Evans Senior Vice President of Capital Markets.

Thank you, operator. Good morning, and thank you for joining today's conference call. With me today are Nicholas Vita, our Chief Executive Officer; David Hart, our President and Chief Operating Officer; Derek Watson, our Chief Financial Officer; and Jesse Channon, our Chief Commercial Officer. Earlier this morning, we issued -- during a press release of Cresco Labs announcing the mutual termination of the previously disclosed arrangement agreement with Cresco Labs. Following that announcement, we also issued a press release discussing business updates for Columbia Care as a stand-alone company. Both press releases will also be filed with the applicable Canadian securities regulatory authorities on SEDAR and the U.S. Securities and Exchange Commission on EDGAR. Copies of the releases are available on the Investors section of our corporate website, where you will also be able to access a replay of this call for up to 30 days. Please note that the remarks we make today regarding future expectations, plans and prospects for the company constitute forward-looking statements within the meaning of applicable Canadian and U.S. securities laws. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, which we disclose in more detail in the Risk Factors section of our annual Form 10-K for the year ended December 31, 2022, which has been filed with applicable regulatory authorities and also in subsequent securities filings. We remind you that any forward-looking statements represent our views as of today and should not be relied upon as representing our views as of any subsequent date. While we may update any such forward-looking statements in the future, we specifically disclaim any obligation to do so, except as otherwise required by applicable law. With that, I will turn the call over to Nicholas Vita to get us started. Nick?

Thank you, Lee. Good morning, and thank you all for joining our call today, particularly on such short notice. This morning, we announced the mutual decision between Cresco Labs and Columbia Care to move forward as separate stand-alone companies and terminate our arrangement agreement under which Cresco was to have acquired all of the issued and outstanding common shares of Columbia Care. While the premise of the transaction was strategically sound over the past 16 months, the market landscape changed. As a result, after serious consideration, the Board with the full support of management, unanimously determined that it was in the best interest of our employees, customers, shareholders and partners to remain independent and move forward to pursue our strategy to maximize shareholder value and optimize the untapped opportunities embedded in Columbia Care's business. Since the announcement of the transaction in March 2022, we have had a duty to operate and prepare for any potential outcome, either as part of a combined company or as a stand-alone Columbia Care. We did just that. And in spite of the contractual limitations imposed by the transaction, we continue to press our long-term goals by remaining decisive where possible and focusing on building the best company in the industry. During the last 16 months, we reviewed every aspect of our business and made substantive changes that significantly improved our operations, positioning us with significant strategic and operational strength at this critical inflection point. I know that many of you have stayed closed to Columbia Care and our story over the past 1.5 years. As such, this news will likely come as a little surprise. You are also keenly aware that during the transaction process, the Columbia Care management team has taken proactive and assertive steps to enhance our operations, drive a leaner organization, focus on cash flow generation, monetize underperforming assets and leverage our growth platform to expand in the most strategic geographic locations. To put it simply, we never stood still and remain committed to driving value for all for our company and shareholders. Now we are free to accelerate change, further enhance profitability, proactively manage our balance sheet and drive forward towards free cash flow generation. Thanks to our strategic portfolio of scaled markets and our consistent drive to innovate, we believe we are one of the best positioned companies in the cannabis industry. We now have a clear path to fully realize the growth opportunities that lie ahead and are relieved and excited to be in control of our destiny by executing against our strategic plan to drive shareholder value. To that end, I want to expand on the corporate actions we announced this morning, which are focused on driving operational efficiencies, managing liquidity and generating free cash flow. To start, regarding our balance sheet. We've already begun taking tangible actions to improve liquidity and optimize our debt instruments by working collaboratively with existing bondholders. We are grateful for the institutional support we received from stakeholders and have been able to set in motion an exchange that will reduce cash interest costs and extend maturity dates as we transition to being free cash flow positive. To that end, we have received commitments from several of the largest holders of our 13% senior secured notes due May 2024 to exchange into the 9.5% senior secured notes due February 2026 on a one-for-one basis. We are in ongoing discussions with a limited group of additional holders to exchange additional 2024 notes under the same structure. These private exchange agreements will meaningfully reduce the principal of the 2024 notes from $38.2 million reduced the cash interest cost for the exchange notes by 350 basis points and extend the maturity to February 2026. More details will be provided upon closing of the exchange, which we expect to be this quarter. In addition, we've been contacted by several of the largest debt holders in order to facilitate additional balance sheet enhancement efforts. We intend to pursue these alternatives to further reduce debt and interest expense and extend maturities. With other tranches of debt and are optimistic that several creative solutions under consideration will be well received by bondholders and stockholders alike. We've continued to evaluate our organizational design to reflect the current environment and prepare for the future of the cannabis industry. In Q1, we announced the first phase of our cost saving initiatives to reduce operating costs, particularly in corporate G&A, the benefits of which we are beginning to see in our financial results. With the completion of the final phase of our corporate restructuring plan, we expect to realize an additional net benefit to EBITDA of approximately $950,000 in 2023 and approximately $3.8 million in 2024. The primary source of the additional savings is a reduction of 52 employment positions in several markets, primarily from gLeaf''s corporate redundancy as well as a facility rightsizing and divestitures. These operational improvements are expected to be cash flow positive on a net basis in 2023 and 2024. We Including the impact of organizational changes announced today and the integration of Green Leaf Medicals, since December 2022, we have eliminated over $38 million in net annual expense while also improving our organizational design to accelerate decision-making and leverage our scale in markets more effectively. Looking forward to discussing the financial impact of these measures in more detail on our second quarter earnings call in about 2 weeks. Without the constraints of the transaction, the full range of levers are now available to us, including additional divestitures of noncore assets, new commercial mortgages on eligible properties and negotiating with classes of noteholders regarding potential refinancing alternatives, including both the 6% convertible notes due 2025 and the 9.5% senior notes due 2026. In March, we announced the divestiture of our Missouri operations for approximately $6 million, representing the first stage of noncore asset sales. Today, we announced the closing of the sale of our downtown Los Angeles facility for gross proceeds of approximately $9 million, with the expectation to net $3 million subsequent to paying down existing corporate debt. This was one of the facilities we closed in December 2022 as part of the initial wave of cost rationalization. The sale will not only bolster the company's cash balance, but will reduce overall debt and make permanent a net reduction in annual operating costs of more than $8.5 million for Columbia Care operations in California. We are currently pursuing or considering additional sales of assets that are not material contributors to revenue or EBITDA, and we look forward to sharing additional information at the appropriate time. Asset sales of this nature will assist in bolstering the balance sheet and will provide opportunities to further deleverage the company. Regarding additional capital markets initiatives. Today, we announced that we will consolidate our common shares onto the Cboe Canada, the new business name of the Neo Exchange. Related to this decision, we have submitted a request to voluntarily delist from the CSE. The Cboe Canada will remain our primary exchange as it has been since our initial public offering. As one of the few multistate operators listed on a senior exchange, the company remains committed to maintaining index eligibility via Cboe Canada. As a result, we are delighted to convey that we remain included as a component of MSCI Global Micro cap Index. Consolidating on to Cboe Canada will also allow for a more orderly closing price formation, less fragmented trading and greater transparency for our investors, which was complicated by our due listed strategy. As we are in advanced discussions with the U.S. Senior Exchange regarding a U.S. uplisting, we intend to take several additional corporate actions such as a share consolidation to satisfy margin eligibility and meet initial listing requirements. As you know, we already report in U.S. GAAP, and we are already a DC registrant in good standing. I would like to take a moment to emphasize the number of meaningful growth catalysts lay ahead. We have an outstanding portfolio of scaled markets, arguably one of the best in the sector with key markets like New York and Maryland having recently transitioned to adult use. Delaware poised to transition to adult use and additional retail locations in growth markets such as New Jersey and Virginia under development, all of which should fuel continued top line growth opportunities. On July 1, we began adult-use sales in Maryland, adding another high-growth market on the East Coast, which we expect will drive significant incremental growth. As you would expect, we set new records in Maryland as a result with room to growth. We are fully integrated in Maryland, or a significant wholesaler and have 3 operational retail locations in Rockville, Frederick and Chevy Chase, with a fourth in development in Perth George's County. We look forward to providing more updates on our Q2 call. In Virginia, where we are also fully integrated and the largest retail operator with 9 active locations, we've been optimizing our operations with improvements to cultivation and production. We have 3 additional retail locations in development with the next location set to open this quarter. Virginia is one of our top markets and will continue to drive growth and profitability well into the foreseeable future. Additionally, we have been optimizing our fully integrated operations in New Jersey where we have 2 of our best-performing dispensaries in the entire Columbia Care portfolio as well as a substantial wholesale business. We have one additional retail location under development in the state, which will provide additional upside when operational. In New York, given our portfolio of assets in the state with the most scaled operational cultivation capacity in the market, we are well positioned to take advantage of adult-use wholesale and retail channels once they are activated. Having invested considerable capital into our facilities over the past 3 years, our retail and wholesale capacity is poised to accommodate the accelerating growth markets in our portfolio and leverage these regulatory changes without the need for incremental growth CapEx. Today, we are also announcing the appointment of David Hart as, President and Chief Operating Officer; and Jesse Channon, Chief Commercial Officer. David has been with the company since 2016 and and serving as our COO since 2018. With a proven track record and deeply rooted knowledge of the industry and our company, David will oversee all revenue-driving functions. Jesse has been our Chief Growth Officer since 2019 and has been the driving force behind some of our most exciting and innovative initiatives such as forge and cannabis. In his expanded role, Jesse will oversee retail, wholesale, technology innovation, marketing and communications. As we look ahead, Columbia Care will continue striving to be the most innovative company in cannabis. Our entire team is thrilled to revive our ambition to deliver the best customer experience in the industry by leveraging our proprietary technologies like Forge and completing the conversion of our national retail network into cannabis, which we launched in May of 2021. I want to take a moment here to recognize the incredible professionalism and dedication of the entire Columbia Care team. This period has been complicated to say the least, with uncertainty about the company's future at the forefront of many mines. What was never uncertain, however, was our commitment to our constituents, from patients to partners to stakeholders, that was evident across our markets on a daily basis, now we can emerge from this chapter with full control over how we run our business and how we make the most of our strategic positioning as this industry enters the next stage. We are extremely proud of the work our team has done over the past 1.5 years to ensure that we emerge from this process as one of the best positioned companies in the industry. Columbia Care has an enviable position in many of the best markets in the U.S. with an unmatched retail experience in cannabis. We have strong product brands, effective operations, committed team members, significant growth opportunities and a proven track record of execution at clear strategic plan. We are intently focused on proactive balance sheet management and liquidity, achieving positive free cash flow, further optimizing both wholesale and retail operations and implementing technology investments to enhance operations and be positioned as a market leader. I am unwaveringly enthusiastic about the future of Columbia Care. And as we look forward to sharing additional information regarding our go-forward plans on the Q2 next earnings call in August. Finally, I wanted to take a moment to thank you, our investors and stakeholders for your patience and support throughout this process. Without you, there would be no Columbia Care. It is an organizational priority to execute upon our business in a manner that justifies your support and trust over the coming years and months and we look forward to doing that every day. With that, operator, please open the line for any questions. Thank you all.

[Operator Instructions] And our first question comes from Aaron Grey with Alliance Global Partners.

So just 2 for me. First one, I want to touch a little bit more on the balance sheet. Nick mentioned talking with some of the bondholders and pushing out some maturity dates and meaningfully reducing the $38 million due May 2024. Can you just talk -- and maybe give a little bit more color or given at the exchange, but in terms of how meaningful you expect reduce that? And then in terms of divestitures, do you believe there might be more divestitures needed to improve the balance sheet? And do you have any type of target leverage ratio they'd like to be comfortable with?

So Aaron, I think the -- if I could answer that question or reverse before I hand it over to Derek. The -- it is -- I'd like to have our quarterly results from 2Q public before we start commenting on target leverage ratios because I think that the two conversations go hand-in-hand. But suffice it to say, we're seeing positive trends across the business, and we're -- we feel comfortable reaffirming that our ambition is to be free cash flow positive in 4Q, and we think we're going to get there. As far as the sort of the quantum of the impact to our proteins it's not done yet. What I can say it's material enough so that we brought it up with the market. And frankly, I would have preferred more disclosure than less, but because we still have a few things that are outstanding that are coming in, there were several bondholders that did not want to be restricted that wanted to basically come back and go through their process once we've made this announcement. And so the number today is actually going to be smaller than potentially the number in a couple of days. But when I -- when we describe it as meaningful, our goal is to get as close to sort of moving the majority of the bondholders into a new instrument or finding another way to restructure those holdings -- effectively render the May 2024 kind of an afterthought. Derek, why don't you weigh in?

Happy to. Yes, fair question. I think Nick covered it well. Anything I'd add on the asset divestitures is there's nothing that's going to fundamentally change the core of who we are as Colombia Care. So we've referred back to the Missouri divestiture, for example, that was our only non-EBITDA positive operation in 2022 and other assets that we're looking at are in similar scope of not fundamentally changing who we are, but where there are either underperforming assets or we're not deep in an individual market or part of the market, that's what we're targeting. So again, nothing fundamental.

Yes. If I could just add one thing, Aaron, about the asset sales. If you look at the two that we've announced so far, right, you begin to see -- I think during our last earnings call, we talked about sort of this being the year of the single and to use a baseball analogy, we're going to be looking to make a lot of singles this year. We're not -- we don't need home runs to execute on the plan. And so when you sort of take into consideration sort of what is on the horizon, I would affirm what Derek said. But at the same time, I would also say we've been through an asset sale process recently and we know where the demand is, and there is demand out there for our assets depending on which assets they are. So would we consider sort of scaling up in asset sales to delever further, sure. But obviously, the value proposition has to be compelling. And I think the key thing to remember here is that we're in this for the long haul. We're in this for the -- we're looking at our arc of performance over the next several years and we're using 2023, the second half of 2023, really as a baseline to set that park in motion and give us a trajectory. So we don't need to make any big moves for things to work. We're obviously approaching everything eyes wide open.

Nick and Derik. Appreciate that. Second question for me, you're talking about singles. So I just want to talk about the future and then kind of the future growth opportunities around CapEx, right? So obviously, a big focus on free cash flow positive. Just want to talk a little bit more in terms of what are your kind of future CapEx expectations this year. You kind of implied guidance of just under $25 million in terms of CapEx based off the 1Q run rate. So -- just wanted to know in terms of the free cash flow that you're expecting to get to in 2024, what are your CapEx plans within that? Do you expect to remain at those lower levels or maybe put the pedal back on that for those future growth opportunities?

Yes, Aaron, I'll take this. This is Derek again. So in Q1, as we talked about on our Q1 earnings call, our CapEx for that quarter was around $5 million. We've done a lot of CapEx to build out our capacity, both in cultivation and retail stores to that point. So we're looking at CapEx at similar levels to what we had in. We'll obviously update you more on the Q2 earnings call, but no surprises since what we've articulated based on the Q1 call and what we are continuing to focus on is build out of retail stores, which are obviously at a much lower CapEx per location than what we've already built a cultivation, so that's more the trajectory that we're looking on with limited CapEx and obviously, the maintenance CapEx that will continue every quarter as well.

I mean, and just not to put too fine a point on it, but Aaron, -- this is really maintenance CapEx from now on. We don't need a whole -- unless we want to build out additional [indiscernible], which, as Eric said, is very low-intensity CapEx on a per square foot basis. We don't really need to spend any money to scale up cultivation of manufacturing. That's already done. So we feel like we're very well positioned from a CapEx perspective, and we would actually -- I think we're very comfortable with the guidance we gave, which is effectively maintenance CapEx going forward.

We have a question from Matt Bottomley from Canaccord Genuity.

Thanks for taking the questions and for providing this additional color on today's update. So my question just revolves more around the [shancom] Group. I know you can't speak to or for them directly. But obviously, they had done their due diligence of the markets they want to be in, and we work contractually signed up with the post pro forma entity with both Cresco and Columbia Care. So now that, that's off the table. I'm just curious where that relationship might land, if you know they're digging in and doing more diligence themselves or where that group just might be with respect to continuing to want to enter this space.

I mean, Matt, you've got leaving me a lot of flexibility here to sort of talk about Columbia Care here. But I think -- look, what I would say about the [indiscernible] Group is the following. They're very sophisticated. They have a genuine interest in being the industry. We're going to be there to support them if they'd like to be in the industry. And I think that Cresco will do the same. I don't want to speak for them, and I don't want to sort of go outside my own lane here, but -- we have a great deal of respect for what they have accomplished. And the markets turned out the way the markets turned out. But if you look at the way we've handled partnerships in the past, we've been very creative. I mean, if you take -- take what we did for the Tyson Group, right, and others, we have the ability to launch multiple -- in multiple states in very short order with single brands. And that's not something every company has been able to do successfully. So -- when we think about that landscape and if you harken back to sort of the first quarter conversation, the focus for for the next several quarters is going to be driving gross margin. And I think one of the best ways for us to drive gross margin is to use some of that excess capacity that we have in the corporate emission space. So we've got room to grow organically, but we also have room to grow with partners. And so I would say that the door is always open, but for us, the most important thing was that the process that we went through was exhausting for everybody, particularly for Columbia Care and Cresco. And I think the fact that we ended up amicably on good terms is arguably the most important thing I can telegraph about the future of relationship with the 3 of us.

Got it. Appreciate that. I know it's a bit of a tricky question. And then just one more for me. You talked about it a little bit already, and there's one of the bullets touches on this, but on the asset dispositions, knowing that, obviously, it's a very fluent market right now, and we can't telegraph too far into the future. What about just more additions. You mentioned closing the downtown L.A. facility and sort of labeled some of the states that might be noncore. But is there anything in the next 6 to 12 months that's still going to be more of a wind down as opposed to something that might be sold?

Probably not, probably not. I mean I think we -- if you remember, when we -- in order to get through the first phase of the restructuring, we kind of shut down Europe, we shut down the CBD business. We shut down a couple of dispensaries in Colorado. And it was just a better use of our time to handle it expeditiously when you look at sort of the associated burn. Everything from this point on is sort of marginally EBITDA neutral or EBITDA positive. And if it's not, then it's certainly going to be on the chopping block. But there's nothing that we have that doesn't have residual value that someone wouldn't want to own and pay a purchase price for us. So for us, I think that using the DTLA or the Missouri example is a good one because like when you think about our maturity schedule, you think about our leverage, and you think about how we're trying to sort of manage liquidity we -- these smaller kind of dispositions really fall into a sweet spot, both in terms of the demand profile amongst investors and financeability but also in terms of our willingness to part with a particular asset. I don't know if, Derek, if people want to add to that.

Yes. Just a couple of reimporting comments. So we're on our fifth round of restructuring in the last year, I think. Anything mentioned in his prepared remarks, we acted early on identifying the markets that were a little soft that needed some adjustments. And so there's nothing left in those plans for the moment. But as most companies are, we're always looking at the market data to the extent we need to adjust and react we certainly will, but nothing anticipated in the short term. .

Thank you. And there are no other questions in the queue. I'd like to turn the call back over to Nicholas Vita for closing remarks.

Just -- I guess, I just wanted to thank everybody. I know we've got a lot of conversations scheduled throughout the day. So we look forward to speaking everyone one-on-one or in group settings. And we just really appreciate everyone's time and consideration. We'll talk to you soon.

This concludes today's conference call. Thank you for participating. You may now disconnect.