The Cannabist Company Holdings Inc. (PNK:CBSTF) Q1 2025 Earnings Call Transcript

The Cannabist Company Holdings Inc. (PNK:CBSTF) Q1 2025 Earnings Call Transcript May 11, 2025

Operator: Good day, and thank you for standing by. Welcome to The Cannabist Company First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there’ll be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today. Please go ahead.

Lee Ann Evans: Good morning, and thank you for joining The Cannabist Company’s First Quarter 2025 Earnings Conference Call. With me today are Chief Executive Officer, David Hart; President, Jesse Channon; and Chief Financial Officer, Derek Watson. Earlier this morning, we issued a press release reporting our results. A copy of this release is 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. Certain 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, 2024, and in our subsequent quarterly filings.

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. Also, please note that on today’s call, we will refer to certain non-GAAP financial measures such as EBITDA and adjusted EBITDA. These measures do not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies. The Cannabist Company considers certain non-GAAP measures to be meaningful indicators of the performance of its business in addition to, but not as a substitute for our GAAP results.

A reconciliation of such non-GAAP financial measures to their nearest comparable GAAP measure is included in our press release issued earlier today. With that, I will turn the call over to David Hart to get us started. David?

David Hart : Thank you, Lee, and thank you to everyone who has joined us on the call today. We wanted to begin with an update on the pending debt restructuring transaction that we announced on February 27. The company was pleased to announce last week that holders of the company’s senior notes voted to approve the arrangement at the special meeting of senior noteholders held on April 29. The arrangement resolution, which required the approval of at least 66 and 2/3 of the votes cast by the senior note holders present in person or by proxy at the meeting was approved by over 75% of the votes cast. The principal remaining step in order to advance the transaction is to obtain court approval for the transaction in Canada. Court proceedings are scheduled for later this month to consider our approval request and debt holder objections that have been raised.

We will provide updates as developments warrant as the process moves forward. Given the current financial position of the company relative to the upcoming maturity of $59.5 million of 6% senior secured notes due next month on June 29, 2025, it is essential for the company for the debt restructuring transaction to be completed. With respect to footprint optimization, we’ve continued to make progress. As discussed on earlier calls, over the last 12 to 18 months, we have divested and exited from many underperforming or subscale markets, including Missouri, Utah and Puerto Rico. We have now completed that process for Washington, D.C. as well. In Florida, where we divested our operations last November, we also recently closed on the sale of our remaining license for gross proceeds of $5 million and are currently under contract to sell our loan remaining asset in Florida, the cultivation facility.

Following on the sale of one retail location in California last quarter, we continue to advance our exit from the California market on a facility-by-facility basis with contracts having been recently signed to divest several more facilities. We’re also currently in the process of divesting our business in the state of Illinois, which consists of 2 dispensaries and a cultivation facility. Once we complete the Florida, California and Illinois market exits, the Cannabist Company will be active in 10 markets, down from as many as 18 markets. Notably, of those 10 markets, 3 of them, Delaware, Pennsylvania and Virginia, present future opportunities for growth upon transition to adult use. From an operating perspective, our sector is battling pervasive and persistent headwinds, there is increasing urgency around the pace of change as federal regulation remains unresolved.

Liquidity is tight for most and receivables are aging. The efforts required to offset those headwinds mean we all have to work even harder to simplify and reduce costs in the business. I’m grateful to our entire team for their dedication and for continuing to push forward in a challenging environment. As Derek will discuss in more detail a little later, we made progress in expanding both adjusted gross margin and adjusted EBITDA margin during the first quarter. We remain hyper focused on controlling what we can control. With that, let me turn the call over to Jesse to discuss our operational results and initiatives in more detail. Jesse?

Jesse Channon : Thanks, David. Many of you may recall that I concluded my remarks last quarter by saying that we would continue to focus relentlessly on positioning ourselves with the most optimal footprint, the right products and brand assortment and that we expect further optimization and efficiencies to materialize in 2025. The mantra continues to be simplify and optimize. As David mentioned in his comments, that is precisely where our energies are being applied, and we have continued to make progress despite headwinds. In Q1, our top 5 markets by revenue and EBITDA in alphabetical order were Colorado, Maryland, New Jersey, Ohio and Virginia. In a seasonally down quarter overall, we saw growth in the New Jersey market having opened our third dispensary on December 31 last year.

During the quarter, we completed the exit of the Washington, D.C. market, sold 1 dispensary in California and closed 3 underperforming locations in Colorado, ending the quarter with 55 operational retail locations compared to 59 at the end of Q4. On December 31 of last year, we opened our third location in New Jersey, where we began adult-use sales last month. With the grand opening celebration held on April 29, we currently have 3 stores in development in Ohio and one in Virginia, which are expected to open during 2025. In the first quarter, we launched the dreamt brand in Massachusetts, New Jersey and Virginia, adding to the initial success of dreamt in Maryland. Dreamt has been a winning story for our house of brands with the product jumping to be the top-selling sleep SKU within our Maryland stores and wholesale distribution increasing rapidly in New Jersey.

We are working to expand to new markets in the near future. We also launched Seed & Strain in Maryland, and the brand is now available in all of our operating markets. As for our partner brands, Old Pal continues to show strong brand performance in our Colorado, Maryland, New Jersey and Virginia markets. During Q1, revenue from Old Pal increased 20% sequentially. Our efforts to methodically rationalize our SKUs and pricing architecture continue across all of our markets. We are sunsetting low-margin and low velocity SKUs and shifting biomass from discontinued brands into some of our best-performing brands as we look to optimize on a newly simplified platform. On the wholesale side of the business, pricing pressures continue in a number of markets, and we are aggressively but thoughtfully divesting of products as need be, which impacted our wholesale margins in the quarter.

Improved margins on the retail side are helping to make up the shortfall, and Derek will discuss this more in just a moment. I’ll wrap up my comments by taking a moment to echo David’s comments and express my profound thanks to the entire Cannabist team for their hard-fought efforts to reposition our company. Now let me turn the call over to Derek to dive into the results. Derek?

Derek Watson : Thank you, Jesse, and good morning, everyone. I’ll provide a summary of the key financial results for the first quarter of 2025, the status of our ongoing balance sheet restructuring and comment on our continuing efforts to improve profitability and cash flow. For the first quarter, we achieved $87 million in revenue, a decrease of 9% from the fourth quarter, in part due to the closure of 3 locations in Colorado and the sale of 1 location in California, but also due to the challenging environment in our underlying operations. The comparison to Q4 is also impacted by the partial contribution from Florida operations in Q4 without having closed on the sale of 14 stores in November of 2024. We ended the first quarter with 55 active retail locations compared to 59 at the end of Q4.

Adjusted gross margin in the first quarter was 36%, up 50 basis points over the fourth quarter. Adjusted EBITDA in Q1 was $7.1 million, down from $8.3 million in Q4. Adjusted EBITDA margin, however, increased more than 200 basis points sequentially to 9.5% for the quarter, a sign of slow but steady improvement. As we continue to reference, ongoing divestitures create some noise in our reported results as we’re actively reducing the asset base. For an apples-to-apples comparison, we should discuss the pro forma results of the 11 remaining markets at quarter end as we’ve exited Washington, D.C. and have sold our license in Florida. For those 11 recurring markets, we saw adjusted EBITDA margin of 9.8% in the first quarter, a slight improvement over the reported quarterly results and consistent with the Q4 ’24 equivalent pro forma adjusted EBITDA margin across those same 11 markets.

In the first quarter, wholesale revenue increased 3.5% sequentially to $16 million. However, we also saw another sequential decline in wholesale gross margin. This was offset by an increase in the retail gross margin, which was up 180 basis points over the fourth quarter. Wholesale revenue represented 18% of total revenue in the quarter compared to 16% in Q4 and 17% in Q3. The overhang from unabsorbed overhead and underutilized production facilities remained flat at around a 4 percentage point impact on gross margin, down from the 5 percentage point impact we experienced during 2023. With the smaller geographic footprint, we are continuing to simplify the business and reduce costs. Through several rounds of corporate restructuring, we achieved $23 million in annualized cost savings during 2024, and we’re enacting further measures in 2025 to take more costs out of the system due to our ongoing footprint optimization and overall business simplification.

In the first quarter, operating cash flow was negative $15.4 million and free cash flow negative $14.7 million, both figures including a semiannual interest payment on senior debt of around $9 million. CapEx in the quarter was $2 million as we continue to expect CapEx over the longer term to average around $2 million to $3 million per quarter per quarter, primarily supporting new store openings and enhancements to our manufacturing capabilities. We ended the first quarter with $18.9 million in cash, down from $33.6 million at the end of Q4. As we’ve discussed, managing our liquidity remains a priority, particularly given the challenging operating environment and ongoing divestiture proceeds have been supporting the operating cash needs of the business.

As David mentioned earlier, the anticipated completion of our debt restructuring is key to extending our debt maturities and bringing all of our senior debt instruments into a single class to no sooner than December of 2028. Going forward, we expect continued noise in our reported results until the remaining divestitures in Florida, California and Illinois are complete and the momentum we’re working on in the underlying operations fully takes hold. Improvements in results are also subject to the timing of certain regulatory outcomes such as adult use in Delaware, Virginia and Pennsylvania and the opening of new locations in Ohio and Virginia. As such, for Q2, we’re anticipating a mid- to high single-digit percent decline in revenue sequentially.

With that, I’ll turn the call back to David for final comments. David?

David Hart : Thank you, Derek. We’ll now take your questions. Operator, please open the line.

Q&A Session

Operator: [Operator Instructions] First question comes from the line of Aaron Grey with Alliance Global Partners.

Aaron Grey : Thanks for some of the updates regarding some of the divestitures and that process. My first question, I want to talk about some of the wholesale strategy. There’s a lot of puts and takes that you provided there. So any update maybe you can provide in terms of the best ways you’re seeing to build out that retail strategy at third parties? I know it sounds like you’re doing some SKU refinement. I think Jesse gave some commentary in your prepared remarks. Old Pal seems to be doing well, up 20% sequentially. So just kind of curious in terms of how that progress is going and then how you’re also circling that back to your harvest cycles in those plants.

David Hart : Aaron, this is David. Thanks for the question. I’ll let Jesse step in here to answer that one.

Jesse Channon : So a couple of quick points there. One, as you highlighted, we do continue to see success with the third-party brands that we’ve launched, both from the performance in our own retail stores as well as obviously, how they’re pushing through wholesale. We highlighted Old Pal, but obviously, our partnerships with Revelry and others continue to be strong and like what we’re seeing out of the performance there. From a holistic point of view, one of the things that we referenced was really getting significantly more simplified with regards to the SKU assortment and the products that are ultimately being manufactured and made throughout the supply chain. It’s a huge effort that’s gone on over the last couple of months, and we’re excited by what we’re seeing from early progress.

What we’re ultimately doing is trying to leverage a more data-driven approach to making sure that we’re making the right products in the right sort of scale and leveraging the gardens effectively in order to create the best velocity in wholesale and also better margins. So as we continue to push through some of the older products, some of the legacy brand architectures and SKUs, I think we’ll continue to see some of the pressure that we’ve reported in wholesale overall on those executions. But ultimately, we’re working our way through to a more simplified portfolio in partnership with our third-party brand partners that we think will increase the velocity and ultimately increase the size of the wholesale business.

Aaron Grey : Appreciate that color there. Regarding potential catalyst, adult-use conversion and starts Delaware, continue to see some delays in terms of the start there, but looks to see some slight line of sight to sales beginning. So can you provide maybe any color in terms of when you’re expecting for a start date, how you’re looking at the opportunities there? Any changes you’re making to the ramp-up of inventory or otherwise to position yourself well for the start of adult-use sales in Delaware?

David Hart : Aaron, this is David. We continue to be positioned for the adult-use conversion in Delaware. We’ve obviously gone through a number of market adult-use conversions. So this one feels very similar to others. With respect to timing, I think there’s been some progress in the state of Delaware on a few technical fronts and on the human capital front, where I think they’re bringing in a commissioner. So I think there’s there is positive momentum in the state of Delaware, but I still think the specific timing is not yet clear. We clearly think it’s going to be a 2025 opportunity. The question is how early in 2025, but we remain ready to go as soon as they give us the go ahead. So we’re operationally ready to go.

Aaron Grey : Okay. Great. Appreciate that, David. Last question for me, if I could. Just in terms of cash flow, nice to see the EBITDA improvement in the quarter. Just if you can give some color in terms of maybe some of the working capital changes. I know it looks like operating activities was down a bit on the cash flow. So just how we should best think about the EBITDA improvements translating to cash flow improvements in the near term?

Derek Watson : Yes, sure. So yes, we’ve got a negative operating cash flow in Q1, as you’ve noted, in terms of the working capital contributors to that. You’ll see in the 10-Q that we’re filing later today, we’ve actually got a positive impact on accounts receivable. And back to the wholesale question, we’ve got as disciplined approach as we can on incentives around wholesale based on collection. So that’s actually working in our favor. We’ve got a little more investment in inventory in the quarter and the largest impact around working capital is clearing some accounts payable and accruals. Some of that is just the natural cycle of working capital. We had a large $9 million interest payment in the first quarter. Some of the annual contracts that were on insurance and others have a large payment in Q1.

So that’s impacting the accounts payable investment. In terms of translating EBITDA into cash flow, you’ve seen a positive momentum in adjusted EBITDA quarter-over-quarter. That’s based on the underlying investments and improvements we’re seeing. And as that cycles through the balance of the year, we’re obviously looking to continue to increase that and get back to that positive operating cash position that we saw in Q4.

Aaron Grey : Okay. Great. Appreciate the color, Derek. I’ll jump back in the queue. Thanks very much.

Operator: Thank you. I’m showing no further questions at this time. Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.