Earnings Call: Q1 2020

May 29, 2020

Good morning, everyone. Welcome to TerrAscend's First Quarter twenty twenty Conference Call for the three month period ending 03/31/2020. Listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward looking statements that are subject to risks and uncertainties relating to TerrAscend's future financial or business performance. Actual results could differ materially from those anticipated in these forward looking statements. The risk factors that may affect results are detailed in TerrAscend's annual information form and other periodic filings and registration statements. These documents may be accessed via the SEDAR database. I'd like to remind everyone that this call is being recorded today, Friday, 05/29/2020. I would now like to introduce mister Jason Ackerman, chief executive officer of TerrAscend. Please go ahead, mister Ackerman. Thank you. Hi. Good morning, everyone, and thanks for joining us today. With me, we have Jason Wilde, our Chairman and Keith Stouther, our new Chief Financial Officer. So welcome, everyone. So today and this morning, I'd like minutes to discuss our strategic priorities and some of our recent successes. And then Keith is going to discuss our financial results, and then we'll open it up for some questions. As we discussed on our last call, TerrAscend has entered 2020 with a real solid foundation foundation for growth. This is driven by two ingredients. One, our talent, as I feel we've really assembled, an excellent and effective team, which we do continue to evolve, and some very high quality, operating assets. Together, they enable us to accomplish, you know, our strategic goal of building a super high quality customer focused cannabis business that we believe is capable of sustaining continuous growth and strong profit margins. So for Q1 of this year, we generated $34,800,000 in sales, which represents a sequential increase of more than 34%. We've also achieved an incredibly important milestone of reporting positive adjusted EBITDA on a consolidated basis, and we expect this trend to continue. On that point, Q1 twenty twenty adjusted EBITDA was a positive $4,900,000 or a 14% margin. And this also represents a $10,000,000 quarter over quarter increase in adjusted EBITDA, a $9,000,000 of increase in sales. And I believe what this demonstrates is our focus on growing our business and having as tight of controls as we possibly can on costs. As we stated before, our U. S. Operations represents the greatest growth opportunity for our business. And in the quarter, they accounted for 89% of our revenue and contributed 25% adjusted EBITDA margins. We've developed a strong foothold in The United States by focusing on high growth cannabis markets with favorable dynamics in both the East Coast and the West Coast. And as a reminder, we are the only North American operator with scale, operations in both The U. S. And Canada. And while we see the biggest opportunity in The U. S. Today, we still see substantial long term Canadian market opportunity. But in the meantime, we're very focused on rightsizing our Canadian operations to ensure the business line becomes profitable because that is what we're in business for, and we're working hard at that. In The U. S. Today, we are active in Pennsylvania, New Jersey and California and plan to leverage these East And West Coast hubs strategically expand where the return on investment is justified. In Q1, we completed the tripling of our cultivation facility in Pennsylvania and have begun to see the benefits of that expansion driving our growth in the last month of the quarter and expect to see that continuation of this growth in sales and profitability throughout the rest of this year. We are also progressing well on the build out of our New Jersey cultivation and dispensary sites and expect to see these operationally by the end of the year. I'm also, pretty excited but cautiously optimistic about, New Jersey rec ballot in November, which could have a very positive impact on the growth of that market. Since our last call, we have continued to see strong demand across our business despite the current pandemic. And we'd like to reiterate that all of our facilities and dispensaries have implemented strict protocols to protect the health and wellness of our employees, our customers and patients during this very difficult time. We have introduced in Pennsylvania a drive through which has been a great success and curbside pickup at most all of our dispensaries locations. And across the company online revenue for our retail locations have increased 4x you know, driven by COVID. And, you know, given my background as an online retailer, this makes me particularly excited because I do believe that digital is a big part of the future of our business. Last week we announced a $30,000,000 private placement that will position us with a very strong balance sheet to complete our investments in The U. S. We are propelling the growth of our business through this investment. And as you may recall, early this year, we strengthened our balance sheet through the Canopy loan and the concurrent repayment of the $47,000,000 U. S. Credit facility. And we had plans to complete this current fundraising as part of that overall financing strategy to support the completion of our U. S. Build out. Some of the main projects included in that is the construction of our 150,000 square foot New Jersey facility, which is scheduled for the end of this year. And we plan to open four new apothecaring dispensaries across all three states that we're active in, bringing the total footprint at the end of the year to nine with added locations planned for early next year. And lastly, before I turn the call over to Keith, I'm excited to announce that we anticipate that based on our strong success to date that our Q2 twenty twenty net sales will be at least $45,000,000 representing excess of 30% sequential growth as well as ongoing expansion of our gross margins and adjusted EBITDA margins. As I continue to focus on building a world class team, I'm very excited to have Keith as our new CFO. Keith has deep CPG experience in highly scaled global businesses and brings very strong financial acumen and rigor to the team. And with that, I'd now like to turn it over to Keith to discuss our financial highlights for the first quarter. Then we'll open up for questions. Thank you. Thanks, Jason. Good morning, everyone. Before I start, I'd just like to say how excited I am to be on the TerrAscend team and really impressed with what I've seen so far since joining about a month ago. As a reminder, the results I'll be going over today can be found in our financial statements and MD and A and all results are in Canadian dollars. Net sales increased 139% to $34,800,000 in Q1 compared to 14,600,000.0 same quarter a year ago. This growth was driven by our U. S. Business, which delivered $30,900,000 in revenue in the quarter, as Jason said, representing 89% of total company net revenue and really reflecting TerrAscend's continued focus on this important market. The increase in revenue was driven by the operational scale up of our U. S. Footprint, which the company has strategically expanded through investments in production capacity as well as wholesale and retail sales capabilities as Jason outlined earlier. In Q1, gross margin before gain on fair value of biological assets was 45% compared to 10% last year. The increase in gross margin is the result of the company's shift to higher margin revenue opportunities in The U. S. As well as the ongoing initiatives the company has performed to rationalize its Canadian operations to the current market opportunity. Importantly, our Q1 gross margin in The U. S. Before gain on fair value of biological assets was 57%. In the quarter, G and A was $14,600,000 an increase of 66% versus last year, but less than half the rate of net sales growth. The change was primarily driven by the twenty nineteen acquisitions in The U. S. The company expects to continue to strategically invest in acquiring the talent and developing the appropriate infrastructure to ensure continued expansion in the high growth U. S. Market while also driving operating leverage as the company's operations continue to scale. In Q1, adjusted EBITDA was a positive $4,900,000 compared to negative $5,500,000 last year. On a geographic basis, adjusted EBITDA from the company's Canadian and U. S. Operations in Q1 was minus $3,300,000 and positive $8,200,000 respectively. Importantly, adjusted EBITDA margin from the company's U. S. Operations was 25%. We ended the quarter with $31,400,000 in cash and equivalents including restricted cash compared to $8,600,000 at the end of Q1 last year. As Jason noted earlier, subsequent to the quarter end, we announced a million dollars non brokered private placement. Based on strong investor demand, we announced this morning has been upsized to $37,000,000 The first tranche, which included a $20,000,000 lead order from JW Asset Management closed on May 22 and the second tranche totaling $7,100,000 closed yesterday, May 28, and we expect to close the remaining proceeds by the end of next week. Finally, before closing, I'd just like to say that after one month on the job and getting to know the team and the company's capabilities, I'm really impressed with what I've seen so far. However, there is also much work to be done to continue to strengthen the company's foundation for future growth. To that end, we have initiated a finance transformation effort which will upgrade, standardize and streamline our accounting, financial, IT and management processes and systems. This effort will be a key enabler to future sustainable and predictable growth, and I look forward to reporting our progress in future updates. With that, I'd now like to turn the call back to the operator to open the call for questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from Kenric Ty from AltaCorp Capital. Congrats on the quarter. Very strong performance, nice to see a positive surprise in the space. Jason, could you speak to the momentum you're seeing in your East Coast versus West Coast operations? How to think about the progression of that momentum through the year? And if you could also then just sort of line that up with the cost discipline and cost controls we saw in quarter and how you'll execute against that for the balance of the year as well, please? Sure, Kendrick. So if you look at how we're growing right now, the largest increase in our throughput and capability was in the East Coast operations by tripling our cultivation capability and manufacturing capability. And as I said, as that came through the end of the first quarter and will be fully realized on the second quarter, that will be our largest propelling of growth into the second quarter. And given the profit margins that exist within the vertical integration operations that will continue to put positive momentum in our overall earnings capability as that expands. On the West Coast operations, you know that's a relatively, mature market and the growth will continue to be shown through the opening of, largely through the opening of additional dispensaries which we have in the pipeline at the moment, and we continue to work with the local governments finding additional locations. We have a nice pipeline there. And as well as, throughout the year, as you recall, we are expanding and have spent the money mostly already to expand our high quality, cannabis growth, in the West Coast for our vertical as well as our Valhalla operations. We opened a new facility to expand that. So we expect to see that show up, more towards the middle of the back of the year. And then, of course, New Jersey, which will then be following up behind it, which largely will be seen into the following year, which we think is a will be a great accelerant as continued growth for our business. You. And Jason, just a quick follow-up on the East Coast or Pennsylvania specifically. Could you remind us how many dispensaries you would expect to have opening in this second quarter? And separate to that, how the performance of the Pennsylvania business, both in quarter and dependent on whatever dispensaries you're opening in the second, how that margin performance is tracking relative to your prior comments, your level of confidence around that opportunity set? We realize it remains supply constrained and the margin profile is attractive, but any color you could provide there would be fantastic. Thank you. Sure. So we have three licensed dispensaries in the state of Pennsylvania and three licensed in New Jersey. So that third and second one has opened up about six weeks ago, and the third will be opening up sometime during this second quarter, probably towards the back end. And dispensary margin operations have been strong. And interesting enough, as you know, online has been a larger part of the business in COVID, and COVID has continued to provide strength, we're seeing very strong margins at our dispensary level. And we also, as you can imagine, with the scaling up of our operations in cultivation and manufacturing, that tripling has also provided some substantial scaling opportunities. And I believe that we're a very effective, operator. And then I gotta tell you the team there is just knocking it out of the park. They're really a strong team. And, you know, they're very super cost conscious, and this expansion has given us substantial leverage in our in our operations. Thank you. And just a quick final one for me, if I could. The non brokered private placement upsized and oversubscribed. Could you speak to what flexibility that provides with respect to either current operations or opportunities perhaps outside of your current operations and geographies with that most recent capital raise? Sure. So the the raise is the dollar raise, we did have a a substantial oversubscription for it. So we have well overfunded our capital needs. So this amount is is is in excess of the needs for us all the way through into, next year. So it gives us a little bit of powder, so we will continue to do and be opportunistic on, outside of our current capital plan to look to, to be opportunistic. So, yeah, at the moment, it's not earmarked, but, you know, we'll we'll use our disciplines, but we'll be opportunistic. Great. Thank you. I'll get back in queue. Sure. Thank you. The next question comes from Robert Fagin from Stifel. Please go ahead. Thanks guys for taking my questions. And I'd echo congrats on the strong profitability there. Thank you. Yes, thanks. So Jason, if I could ask you maybe to give us a bit of color, whatever is available for the performance in California in this quarter with obviously, I guess, strong performance on the East Coast division, could you give me kind of like an order of magnitude of relative performance for the West Coast, kind of, retail operations in comparison? That would be great. Sure. So the, dispensary operations in the West Coast, had good performance, but the level of overall growth that we're seeing on the East Coast with the large expansion, so it's a smaller we said, California as a market is more mature, so you would expect to see, more mature growth rates overall in that marketplace. And so for the first quarter, that's, you know, what what you would have expected. But, again, I'll I'll reiterate that, you know, there were no additional dispensaries opened in our channel in the West Coast. We have a pipeline that we're building of new retail opportunities, and we've been investing substantially, which most of that money has now been spent, to increase our grow and increase our manufacturing capability, will be seeding future growth for that West Coast operation. Okay. Great. Thanks for that color. And if I could ask another one on shifting gears to Canada. So there was, I guess, a good sequential growth in Canadian revenues, but still quite a bit below the kind of quarterly run rates we saw historically. What do you think is the possibility to recapture some of those kind of higher sales levels in Canada, if that's something you guys envision? And if not or maybe if not, what kind of growth trajectory should we expect going forward in that business? Yeah. Great question. So in Canada, you know, I I sales to me are less important than profitability. And so as we kind of dissected our where we were, it's it's my assessment overall is that we need to make sure that we're going after profitable growth, not just growth. So, through the last four months, we've done a complete, you know, top to top review of every product we have marketplace, our costing, our processes, and so forth. So I have intentionally kind of pushed and backed off things that are not what I think, making sense for the long term. So what I would say is that we are reseeding our portfolio in a way that will position us to have sustained supply and sustained product and sustained margins, and we're in the middle of that. So I expect that that overall growth, as you saw, come down. And I believe that we've built a foundational base largely off of that. It takes a little bit of time to work our way into the market with new SKUs that we're launching and, you know, changing some of the profiles that I think are more logical relative to the demand in the marketplace. So I think we'll see those come in, towards the back half of the year, but we are in a transition, as you also know, and I stated in the last call. We've done a substantial, cost reduction in the Canadian operation, which will begin to show up, soon, and rightsizing that business. So I really feel that that opportunity sits more in the back half of this year. Great. Thanks for that as well. And I guess if I get one more in, insofar as your U. S. Kind of EBITDA margin for the quarter, 5%, respectable. Is there some kind of indication you could give us about whether the CBD or Arise Bioscience business unit is a drag or kind of augments a little bit that that profitability profile? I I can imagine it is not as strong as, you know, what you have in PA, but is it you know, are are we looking at kind of EBITDA losses there as we are in Canada here? Well, we don't give specific, guidance on any, particular asset. What I would say is that similar to Canada, the the CBD business did have some profiles of products that had lower margin and some at higher margin. And we've rejiggered the team. We've got great leadership there right now. So into quarter one, versus the previous quarters, we did have a increase in our margin structure as, again, know, that top to top review of all of our SKUs and how we're going to marketplace. We made some great progress, in our margin profile. But I think as you've seen broadly across the CBD spectrum, you know, business as a whole doesn't have a lot of momentum relative to THC. So, you know, that business as a market as a whole is more challenged, and it's harder to drive growth. But overall, you know, our gross profit margins did see some improvement, and I believe that business is set up, for success in the future. And just as a note, COVID has had an impact on the CBD business because a large amount of those stores are not considered essential, which, you know, will also have an impact. But I do believe that that business has, good potential. Again, kind of hopefully seeing that more towards the back of the year than at the moment. Thank you. The next question comes from George Yulibashev from Clarus Securities. Please go ahead. Good morning, guys. This is George dialing in on behalf of Noel. Congrats on a great quarter as well. Just a couple of questions here for me. You give us a sense of the wholesale competitive environment in Pennsylvania at the moment? Yeah. Sure. So what I'd say is it is evolving. You know, it is a relatively new marketplace. So the way I would characterize it is that the the the market started at being an undersupplied marketplace. So if you had, cannabis, then you could sell cannabis, and that's, you know, in its typical cycle. A reminder, the one thing I love about Pennsylvania, it's relatively imbalanced between the the canopy that's undergrowth and the relative growth in retail stores. So as we continue to see the retail dispensaries, now hit 80 out of the one fifty, The dispensaries keep on opening up. And even as cultivation, which I believe I'd consider to be now close to balance as opposed to being undersupplied, we finally reached a point where it's a bit imbalanced. But we still see relatively firm pricing. Other people are also coming along with capacity. But if you look at the 80 dispensaries going to 150, and strong patient growth in that marketplace, I believe that that market has lots of room to grow and that the additional capacity brought on by us and others will be continued to be taken up by the growth in overall consumer demand. So we feel we feel good, but I characterize it as, you know, moving from undersupplied to being healthy but competitive. Got it. Okay. Thank you very much for that color. And just the last question here. On the New Jersey front, what are the key milestones that you guys would need to reach to be able to open your first store there? And, also, do you have any additional store locations identified in the state at the moment? Yeah. So our our Phillipsburg location is under construction, and that is slated to open in the third quarter. We have signed letters of intent on one location and a second letter of intent that's being finalized right now. So we've identified the locations. So we still have to go through the normal course process But we do, in my mind, have the identification of those three locations, where we are. And New Jersey construction, is moving along nicely. During COVID, you know, getting construction permits was a little bit challenging, so that was a bit frustrating. But, you know, we've got a good construction team over there, guys I've worked with in my previous life, you know, on top of it. And so that's that's all moving along nicely. Okay. Perfect. Well, thank you very much for the color. Yeah. Thank you. Yeah. My pleasure. Thank you. The next question comes from Eric DeLoret from Craig Hallum Capital Group. Please go ahead. All right. Great. Thanks for taking my questions, guys, and I'll offer you my congrats on the strong profitability as well. First question for me, I was wondering if you could just talk about the M and A pipeline and how JW Asset Management could sort of be sort of a lead in for you guys and just sort of how the deal flow from JW Asset Management could potentially be active in acquisition for you guys? Just a little bit color there would be helpful. Thanks. Yeah. Sure. You know, it's a good question because one of the compelling reasons for me to, you know, join the team honestly is the partnership with, with Jason Wilds and and the firm because, you know, as you know, JW has been a long term investor in the space and is, you know, in the pipeline of pretty much all deals that are coming through, which, you know, for me, takes a lot of pressure off of making sure that I'm worrying about the deal flow and focus on the business. So we're seeing a ton of stuff is what I'd say. It's what I love about the partnership. So we we pretty much see everything that comes comes across. But at the same time, I'd say that we are we are not just looking to grow for growth's sake. We are very focused and have a lot of strategic filters to our process. And, you know, Jay and I, you know, speak about 100 times a day. So, you know, that filter is known and understood, and so we're just we're focused, but the pipeline is, is good. And I think as you know, it's an interesting time. One thing to love about the space at the moment is there's, you know, as the musical chairs have stopped in, you know, in in large part in the in the in the markets around, funding is a little tougher these days, that does present some great opportunities, which I'm I'm pretty excited about. But, you know, we'll we'll we'll maintain our disciplines. Yeah. That's great to hear. And then just, last one for me. Figured I'd try another one on, PA, wholesale strategy. You know, looking at menus online, it looks like Alira has more SKUs in third party dispensaries than any other brands. Are there any market share numbers that you guys can share? And do you have any, you know, SKU expansion or SKU rationalization plans that go along with your tripling of of, cultivation capacity? And, you know, are you guys, comfortable with your current SKUs and, know, now it's really about just increasing volume? So, you know, market share, gosh, I've heard so many different numbers. I think I know what the market share numbers are, but I'm a little cautious to quote them. But I would say as a primarily a wholesaler, so if we were to quote market share, we would be focusing on the wholesale market share because as you know, with having three dispensaries out of the 8,085 that are open right now, you know, that you can just say three eightieth of the market share at retail. But on a wholesale basis, with our capacity, you know, I would say we're certainly above 20%, share at the wholesale level. If not not high would my would be my estimate and and so forth. I don't know where we rank relative to exactly the the other top players, but I'd say we're right we're right up there with them. And with with respect to products, you know, listen. We're at the end of the day, we are in the business plain and simple of making customers and patients happy and satisfied. And if you're going to do that, you can't just have products available. You have to have great products available and products that are evolving with the needs of the marketplace. As Pennsylvania continues to increase the count of patients, the demographic of those patients will evolve, and therefore, the taste of those patients will as well. So we have a great product development cycle. So the answer is no. We obviously have some killer SKUs that are running through the system. But make no mistake, product development is a critical part of the lifeblood of this business, and they are, you know, really great. We've got a great group of scientists. We meet all the time, or they meet all the time. So, product development is a big part of what we continue to expect. But given the velocities that we're moving for the facilities, we continue to see scale and efficiencies in all the stuff that we produce. And just note that, you know, we're not just a flower business. A large percentage of our revenue does come from manufactured products, and I believe that's a very important continuation of our of our strategy. Mhmm. Mhmm. Yeah. That's excellent. And then just one one last follow-up for me, on on PA side of things. So, you know, it's great to hear that you guys have, you know, completed your expansion, in q one. I'm just wondering, is that expansion, you know, fully planted, or are you planning on, kind of scaling that, you know, the the amount that's planted throughout the year? We, do have the ability to further expand capacity another 15%, and we do plan on putting that in place, during the course of the third quarter, which can become available into the fourth quarter of this year. Okay. Great. Alright. That's it for me. Thanks, guys. Thank you. Next question comes from Glenn Mattson from Ladenburg Thalmann. Please go ahead. Hi. Thanks for taking the question. So just curious on I think you guys have quoted a few different times that Alera had 59% EBITDA margins prior to the acquisition. So I'm just curious as to what do you think those margins might look like as you scale? Like I'm assuming they're going to come in a bit, but just kind of a ballpark range for how we can think about it since it's going to become, you know, likely a large percentage of the business by the fourth quarter, you know, even larger. Yeah. So we're we're we're not quoting margins by department at the moment. But what I what I would say, if you look at our 25% in contribution this month and that largely did not fully reflect the growth of the expansion with that $10,000,000 flowing through the operation from quarter to quarter, you can kind of extrapolate on how that will play through into the numbers, going forward. You know, the East Coast vertical operations are what I would say, you know, at the upper end of the more profitable side of of the business, particularly as the market maintains a generally healthy equilibrium between supply and demand. And as we continue to increase capacity, we are growing sales in excess of growing our costs in that marketplace, which not to say that will expand our margins because, you know, we're very focused on being the highest quality and lowest cost producer. So to the extent that we see any price compression, we're going be right there. And we believe we can kind of hold our margins as we drive growth and competitiveness. Great. Thanks. And in California, I think I'm not sure if you updated when exactly you think the Berkeley store will be open. And then perhaps you did and I missed it, but any insight as to what the further expansion will look like as far as geographically speaking in California? And that's it for me. Thanks. Yeah. Berkeley actually was scheduled to be opened by COVID doctor, so construction is done. I believe that we'll be opening up Berkeley in the month of July now coming into the summer. You know, COVID still is affecting the college town, so, you know, we're kinda using our judgment on that. Capitola is under construction, so that will be largely a fourth quarter opening. And, you know, the team has, since TerrAscend has been involved, has been supporting the efforts with that they've done to support finding additional locations with towns and applying for licenses. So they were very active so not to announce. The things that we do have, what I call, you know, seeds out there in the marketplace which we are encouraged and hope to continue to be issued additional license opportunities. In terms of focus, we are really focused on Northern California right now. You know, California is a big place. I'm a big believer in scale, line of sight, you know, eyes on price management. So we're very focused in the generally kinda Northern part of California so that we get leverage on our team's consistency, customers, brand, marketing, delivery, and so forth. So that's really where our our focus is at the moment. Thank you. The next question comes from Peter Ferrero from Ferrero Enterprises. Go ahead. Jason. How are doing? I just got two questions. Can you talk about a little bit about Heather Malloy and what she means to TerrAscend? She was instrumental in getting the Alera deal done. And then my second question would be, when do you think the State Flower acquisition is gonna close? So Heather runs business development. So biz dev is an incredibly important part of our operations today. In terms of, I think you asked sorry. The second question was future acquisitions. Sorry. Can you repeat that one? With, State Flower, because that that was supposed to close, I believe. Yeah. Do you know when that'll close? So the the general, it's now in our numbers, and there is an earn out payment based upon the the year's revenue post expansion. So we've been funding and have finished funding, and they'll be opening soon the, further expansion. So I believe that will close officially, during 2000 and, '21, probably the middle to end of twenty one. I could be wrong exactly on those dates, but I'm pretty sure that's roughly it. And just one more quick question. Do you still like the Massachusetts, market right now? Not during COVID. But, yeah, you know, it's it's interesting that marketplace. I think it has some there's definitely strong demand. There's a lot of players. I said if we could find the right entrance into that marketplace with enough scale, I do. I wish you can get more than three dispensaries into marketplace, but I think there are some good margin dynamics. The state has been a little bit rough at getting locations, you know, up and running. But I do believe if you can find the right positioning there, there is good money to be made, and there is a good there is good consumer demand. So I would say yes, but cautious, but it's got to be exactly the right spot. It's not just, you know, being there for the sake of being there. Okay. That's it for me. Thank you, Jason. Thank you. Thank you. There are no further questions at this time. You may proceed. Okay. So if there's no questions, I just wanna thank all of you for covering us and for listening. And, that's it. We look forward to speaking to all of you the next quarter, hopefully, leaving better results. Have a good weekend. Bye. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.