Vireo Growth Inc. (VREO) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. My name is Prilla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vireo Growth, Inc. Third Quarter 2024 Results Conference Call. The company would like to remind everyone that today's conference call may contain forward-looking statements within the meaning of U.S. and Canadian securities laws. These statements are based on management's current expectations and involve risks and uncertainties that could differ materially from actual events and those described in such forward-looking statements. For more information on forward-looking statements, please refer to cautionary note regarding forward-looking statements in the company's earnings release. I'll now hand the call over to Chief Executive Officer, Amber Shimpa. You may begin.

Thank you, and thanks to everyone for joining us this afternoon. With me on today's call is Interim CFO, Joe Duxbury. I'll begin today's prepared remarks with a review of our third quarter and recent business highlights on Slide 3 of today's presentation, which should be available in the Quarterly Results and Events and Presentations section of our Investor Relations website. Third quarter results reflect continued solid performance across our core markets and the ongoing commitment to executing our CREAM & Fire strategy. Total revenue, excluding discontinued operations in New York, increased 6.2% year-over-year to $22.4 million, with performance driven by continued double-digit sales growth in Maryland and offset by lower retail sales in Minnesota. As we discussed last quarter, we anticipate more -- we anticipated more challenging year-over-year comparisons of financial performance during the third quarter as we began to anniversary the launch of adult-use sales in Maryland as well as the early progress that was made in the initial phases of our CREAM & Fire strategy. Minnesota's medical market has slowed after experiencing very strong growth last year, catalyzed by the introduction of flower products in 2022. This is an expected slowdown as the market anticipates the introduction of adult use in 2025, although we were pleased to drive same-store sales growth of 3%. Despite more challenging year-over-year comparisons of financial performance, we continue to make progress operationally with improvements in our core market key performance indicators shown on Slide 4 of today's presentation. Harvest yields and flower quality both showed strong improvements as compared to the third quarter of last year. As a reminder, the summer growing season in our Minnesota greenhouses is our seasonally most challenging from an operations perspective. Our hot humid summers are hard on the plants and our team, and so we're especially pleased to see strong year-over-year performance in these indicators as it relates -- as it reflects the hard work and dedication of our ops teams to drive continuous improvement. Our team is also continuing to advance our hemp-derived beverage strategy, which we launched earlier this year and now also includes [ intoxicating ] hemp-derived gummy products under our Hi*AF and Boundary Waters brands. The launch of Hi*AF and Boundary Waters hemp products is helping seed some of our adult-use brands in market before the launch of adult-use sales in Minnesota. But we're also excited about the potential for these products nationally as we've continued to expand our distribution network for both local and national distributors. The development of our Hi*AF and Boundary Waters beverage brands was a low-risk, capital-light endeavor. And while speculative at this point, we have begun to see sales from these SKUs and believe that they could become meaningful value drivers if they gain and sustain market traction as we take them on the road. We were also pleased to recently secure an additional $10 million financing commitment from our lender in the form of a convertible note, which was priced at a significant premium to market at the time of $0.625. This facility reflects continued support by our lender for the long-term success of our business and enables us to continue executing our CREAM & Fire Strategy and preparing for the launch of adult-use sales in Minnesota. This new capital commitment from Chicago Atlantic follows their other recent decision to voluntarily convert all of their previously outstanding convertible notes, which saved us future cash interest expenses of $1.3 million and solidified themselves as our largest shareholder. Moving on to some additional state market updates on Slide 5. In Minnesota, we've been reviewing our Minnesota retail location to identify low CapEx opportunities to relocate or retrofit our stores to support a successful AU launch. We've begun the planned relocation of our Moorhead, Minnesota dispensary, which we mentioned last quarter and are in the process of finalizing some additional market expansion and retail footprint enhancements during the fourth quarter and into early next year. In New York, we're continuing to work through our ongoing divestiture process, although as we noted last quarter, the process has taken longer than we've anticipated. However, we are under much less pressure with respect to the timing of this divestiture given the improved regulatory environment and recent extension of our credit agreement. And it's been good to see the state making progress and sending signals that it's allowing for a more robust regulated market. Despite our intent to move forward with the divestiture, we did activate some flower rooms at our state-of-the-art indoor facility, which we refer to as Bluebird and currently have 7 flower rooms in this facility in production, supporting flower sales through the wholesale channel to the recreational market. In Maryland, we are continuing to grow market share overall and are especially proud of our market share growth in vapes after discussing throughout the course of this year that we believed we had a strong opportunity to carve out a leading position in manufactured products. According to the state disclosures, total market sales in Maryland were up about 8% year-over-year in Q3. Our retail revenue was up 12% and wholesale was up 26%, representing total growth of approximately 7% year-over-year, 17% year-over-year. On a sequential basis, the Maryland market was up about 3%, and we were up about 6%. This concludes my review of business highlights from the quarter, and I'll now pass the call to Joe for some brief financial highlights.

Thanks, Amber. We provided our customary financial detail slides for the third quarter on Slide 6. As Amber mentioned, year-over-year comparisons were more challenging in the third quarter. We have not had any additional regulatory catalysts for new store openings since the launch of adult-use sales in Maryland last year. As a result, we anticipate fourth quarter results to reflect similar trends that we experienced in Q3 with some incremental CapEx expenditures that are supporting the launch of adult-use sales in Minnesota next year. Slide 7 provides a summary of our core market revenue performance and key financial metrics. For a complete review of state-by-state revenue performance, including non-core markets and discontinued operations, please refer to our Form 10-Q, which will be filed with the SEC later today. Slides 8 through 11 contains summaries of our balance sheet with a pro forma comparison to year-end 2023, following the recent closed $10 million convertible loan as well as our current debt outstanding, share capitalization and EBITDA reconciliation table. I'll now turn the call back to Amber for some closing comments.

Thanks, Joe. I'll close today with a reminder of our key strategic objectives for 2024, most of which reflect continued execution of the key tenets of our CREAM & Fire Strategy. Our primary focuses for the remainder of this year are twofold. One is preparing for the launch of adult-use sales in Minnesota next year; and two, driving continued improvement across our current operations. Our recent $10 million financing commitment is enabling us to continue executing these plans with additional support for CapEx and working capital needs. These funds will continue to support some of our planned dispensary relocations as well as initiatives to expand our flower production for the adult-use market. We are continuing to pursue a positive outcome in our ongoing litigation with Verano. Our previously scheduled October 17 hearing date regarding the suitability of our claims was delayed for reasons outside of our control, but we are working diligently to move this process forward, and we'll provide updates as they become available. That concludes our prepared remarks for today, and thanks to everyone for participating on today's call, and we're now ready for questions.

[Operator Instructions] And your first question comes from the line of Eric Des Lauriers with Craig-Hallum Capital Group.

I was just wondering if you could expand a bit more on the CapEx plans as you prepare for Minnesota adult-use. If you could sort of, I guess, split that out between your retail stores and your production facility, that would be helpful. It sounds like you're relocating just one store and revamping the footprint of the others. But if you could kind of just expand on your overall CapEx plans to prepare for adult use, that would be helpful.

Eric, thanks for the questions today. In Minnesota, we are looking to focus -- our first priority is the relocation of the Moorhead store, as we mentioned. We're in the process of finalizing our A&E and design and construction bids on that. And so expect to have some CapEx mapped to that build-out of that facility we've located as well as some improvements, and it's primarily more back of house that we're looking at in some other stores and locations. I will share. We are looking and contemplating some additional relocations in lieu of retrofits. We don't have anything firm to share back on that front here at this time.

Okay. Great. And then is there any CapEx that's going to the production facility in Minnesota to help prepare for this?

Yes. We're certainly exploring how we can augment our production side of the business. We have some incremental from a lab and manufacturing perspective, which is pretty nominal CapEx that we're looking to improve on right now at our Otsego facility. From a meaningful CapEx perspective, I would look to -- we're looking at in the range of maybe shorter term, like $6 million or so that we could map towards that to improve our throughput and capacity on cultivation in Minnesota. Anything beyond that would require some additional support from a lending and capital injection perspective.

Okay. That's helpful. And then on the New York divestiture process, could you just give us a bit more of an overview of kind of the current dynamics that you're seeing in the market and maybe just your latest thinking on this asset.

Yes. It's been a while, right? Like we've been working through this divestiture process now for quite a bit of time in New York. And we do see a path forward here. That path is just taking a lot longer to travel. So in the interim, because of that, we spent some time looking for areas where we could pick up any kind of incremental upside, if you will, in the business instead of just simply sitting tight. And so we did some ROI analysis. And through our recent ROND license that we activated there, chose to turn on a couple of rooms, 7 rooms in our Bluebird facility to bring some quality indoor flower to market. It's a really crowded market, but that is the one area where we feel like it's pretty crowded with [indiscernible]. And so we're pleased with our early progress we've made over the last 45 to 60 days in market there, moving our indoor quality flower.

All right. That's helpful. And then just last one for me. Moving to Maryland. It sounds like you guys have made some nice share gains there, especially on the vape side. Could you just kind of talk about your ability to perhaps continue driving share gains? I'm just kind of wondering what you see, I guess, from a market opportunity and then from an overall production capacity, just kind of how much room you may or may not have to go from current levels?

Yes. So incredibly proud, as I mentioned, of our operations team and cultivation team in Maryland. We've really been focusing on the fire aspect of our strategy there and leaning into continuing to produce products that really delight folks in Maryland. And so a focus has been on vapes. We have upcoming launches around our liquid diamonds. We've been -- we brought someone in on the cured concentrate side of the business. And so what this allows is through our retail channels as well as our wholesale channels, arming our team with some really fire products that they're bringing, which augment the standard flower that we're moving, vapes, edibles, et cetera. So it's really complemented our offerings in the state. We've been able to put forward a menu in our retail stores, which is diverse with a lot of our own products and really empowered our wholesale leaders to be able to move some products that simply aren't available yet in the market and getting a lot of really solid feedback from the team on that.

Great. And then I guess just in terms of capacity, like should we think about you guys as kind of maxing out or here in the near-term horizon? Or do you have more internal capacity to kind of continue driving share gains?

Yes. I mean, directionally, we may have some additional kind of efficiencies eat out of our grow. But at this time, it's probably status quo expectation out of Maryland on the production side.

[Operator Instructions] And I'm showing no further questions at this time. And ladies and gentlemen, this concludes today's conference call. Thank you all for attending. You may now disconnect.