MariMed Q3 2023 Earnings Call Transcript

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November 9, 2023

There are 8 speakers on the call.

Operator

Good morning. My name is Jen, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Merry Maid, Inc. Third Quarter 2023 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. Pound key then the number 1. Thank you. I will now turn the line over to Mr. Steve West, Vice President of Investor Relations to begin the conference.

Speaker 1

Good morning, everyone, and welcome to Merry Maid's Q3 2023 earnings call. Joining me today are John Levine, our Chief Executive Officer Tim Shaw, our Chief Operating Officer and Renny Gulliver, our Head of Business Development. Most of you know Renny having met him on various calls and conference meetings. This call will be archived on our Investor Relations website and contains forward looking statements. Actual events or results may differ materially from these forward looking statements and are subject to various risks and uncertainties.

Speaker 1

A discussion of some of these risks is contained in the Risk Factors section of our 10 ks and our earnings release, which are available on our website. Any forward looking statements reflect management's expectations as of today, and we assume no obligation to update them unless required by law. Additionally, we will refer to certain non GAAP financial measures, which are reconciled in our earnings release and our supplemental slides located on the Investors section of our website. Finally, our Q4 2023 earnings release is tentatively scheduled to be issued after the markets close on March 6, 2024 and our analyst call will be held the morning of March 7, 2024 at 8 am. I will now turn the call over to John.

Speaker 2

Thank you, Steve, and good morning, everyone. I'm pleased to report that Merry Maid had another strong quarter of revenue growth, which was the result of the strong growth in our core wholesale businesses in Maryland and Massachusetts as well as our new dispensaries ramping towards maturity. We reported positive adjusted EBITDA for the 15th consecutive quarter and we remain on track to generate positive operating cash flow for the 4th consecutive year. Let me quickly highlight some of the key achievements since our last earnings call. First, we began adult sales in Maryland on July 1.

Speaker 2

As expected, sales have been very strong. Our Annapolis dispensary sales are trending more than 2 times what they were before adult use. In fact, our Annapolis dispensary is on a trajectory to be our 2nd largest revenue producing dispensary behind our Metropolis, Illinois location. While wholesale results continue to accelerate, sales are stabilizing due to limited flower supply, which we are aggressively addressing through the expansion of the cultivation facility in Hagerstown, Maryland. I could not be more excited for Maryland's long term potential.

Speaker 2

Subsequent to the end of the third quarter, We opened our 5th dispensary in Illinois. Our new Thrive dispensary in KZ is our 12th dispensary across 5 states that we own or manage. And we still have room to double our dispensary counts in Illinois, which we are actively seeking to do so. Additionally, I'm thrilled to announce that we received the certificate of occupancy for our new processing facility in Mount Vernon, Illinois. We are awaiting approval from the Department of Agriculture to begin manufacturing cannabis products, which we expect receipt of shortly.

Speaker 2

For more than 3 years, I have wanted to say to the residents of Illinois, Denny's is finally back. We're quickly ramping operations and our sales team has already secured early sales commitments from the largest retailers in the state. We expect our products to begin selling through our retail and wholesale chains in time for the holiday season. With that, I turn the call over to Tim for his operational update. Thank you, John, and good morning, everyone.

Speaker 3

Let me start my operational review with our retail business. We continue to post strong retail growth throughout most of our footprint during the Q3. Retail revenue increased 2% year over year and decreased about 1% sequentially. While our retail traffic was up 18% driven by new store growth, Our average check was down 13%. All of this is consistent with the industry according to BDSA data.

Speaker 3

Clearly, economic pressures continue to impact the consumer. Despite those pressures, Massachusetts grew 9% sequentially and 42% year over year, driven primarily by our new dispensary openings. Maryland grew 88% sequentially as our Annapolis dispensary, which opened in the Q4 of last year, continued its strong ramp and experienced a significant boost from the implementation of adult use sales. In Illinois, sales declined due to increased retail competition as well as the impact of adult use sales in Missouri. These declines will be partially offset with the recent opening of our KC dispensary.

Speaker 3

Additionally, we are introducing more value products and new product bundles at retail to regain lost traffic and boost average check. We are also redirecting some marketing dollars from national initiatives to local. These same initiatives have helped us regain share in Massachusetts when we face similar competitive pressures. Finally, introducing Betty's Eddy's in our dispensaries and tactically wholesaling our branded products primarily in areas where we do not operate retail locations will help drive traffic to our dispensaries. Overall, we are pleased with our retail business.

Speaker 3

We continue reporting increased revenue Massachusetts, Maryland and Ohio as our new dispensaries ramped to maturity. Moving to wholesale. We reported $13,600,000 in wholesale revenue, which increased 51% year over year and 24% sequentially. In fact, this was the 7th consecutive quarter of sequentially higher revenue and the 5th consecutive quarter of record sales within our wholesale business. This growth was driven primarily by adult use in Maryland, But make no mistake, Massachusetts is also growing very nicely.

Speaker 3

We could not be more pleased with our overall momentum we are experiencing both our Maryland and Massachusetts wholesale business. On the marketing front, we launched our seasonal beach time beddies in July. And I'm proud to say, In October, we partnered with Keep A Breast Foundation, which advances breast cancer awareness, education and supports the millions of people affected by the disease. The limited edition pink packaging of our Acreway Eddies and the Keep ABress partnership were a huge hit with our customers. Our world class R and D team has been working on new and improved versions of our Vibations drink mix, Cake Fusion chewable tablets, our in house gummies and other new products.

Speaker 3

These improvements are focused on efficacy, onset time and the expansion of our variety of need states and taste profiles. These efforts represent a demonstration of the team's dedication to a restless dissatisfaction with the status quo. Over the next 6 months, we plan to launch several new products to include We will extend the Betty's Eddy's with limited time apple pie and champagne flavors this December. We're launching double duos under Nature's Heritage, which offers 2 distinct strains in one convenient package. We're adding Gingerbread and Candy Cane Seasonal disposable vape flavors under our in house brand in time for the holidays.

Speaker 3

And finally, taking a page from the beer and sneaker industries, We recently launched our small batch exclusive loyalty programs for Nature's Heritage. We surprised and delight our Massachusetts loyalty members with an email letting them know that a rare strain in nature's heritage and very limited supply will be available the next day only at our Panacea dispensaries. This has proven to be among the best marketing campaigns we have done as the buzz we are generating is very high. In fact, The initial product drop at our Middleboro dispensary sold out within an hour, and our loyalty members are clamoring for the next strains to drop. That concludes my operational review.

Speaker 3

I will now turn the call over to my good friend, Renny.

Speaker 4

Thank you, Tim, and good morning, everyone. I would like to start with a brief overview of our Q3 financial results. Revenue totaled $38,800,000 in the quarter, which presents a 14% year over year increase and a 6% sequential increase. As Tim discussed, our year over year and sequential growth results were driven by both our wholesale and retail operations. Moving to gross margin, our non GAAP gross margin was 45% in the quarter, which is a decline versus the comparable period in 2022.

Speaker 4

This decline was attributable to a number of items, including macroeconomic factors both domestic and global in nature. These factors have driven up our input costs and have resulted in delays in opening our new dispensaries and other operations due to supply chain challenges. In addition, we have experienced increased competition in Massachusetts and Illinois. We expect gross margin to improve going forward as new assets come online and continue to ramp. Our non GAAP operating expenses were $12,800,000 in quarter compared to $8,700,000 in the Q3 of 2022.

Speaker 4

This $4,100,000 increase was due to planned increases in personnel, marketing and G and A to support our strategic growth initiatives. Non GAAP OpEx was essentially flat as a percentage of sales versus the Q2. And we continue to expect OpEx to decrease as a percentage of sales as our top increases and leverages our fixed costs. Our adjusted EBITDA was $6,100,000 in the quarter compared to $8,600,000 in last year's Q3 due to the previously mentioned growth investments, which require the company to incur costs prior to revenue ramping up. Now turning to the balance sheet, we ended the 3rd quarter with $13,300,000 of cash and equivalents, which decreased slightly versus our 2nd quarter cash balance of $14,600,000

Speaker 2

Our

Speaker 4

net working capital remains strong at $15,500,000 compared to $28,700,000 at the end of last quarter. Cash flow from operations was $7,900,000 and we remain on track for our 4th consecutive year of reporting positive operating cash flow. Moving on to our 2023 financial outlook. While top line growth remains well above industry average, our margins have not improved as anticipated due to the combination of the delayed dispensary openings and their subsequent sales ramps combined with the increased operating costs associated with these new assets. As a result, Our 2023 financial targets are as follows: revenue of $148,000,000 to 150,000,000 The low end of this range implies the current revenue trend.

Speaker 4

The high end of the range primarily reflects the Illinois wholesale operations coming online in Q4. Non GAAP gross margin of approximately 45%, which is lower than the 48% originally guided due to the reasons previously stated. Non GAAP adjusted EBITDA of $27,000,000 to $32,000,000 down from the $32,000,000 to $35,000,000 we previously guided. While EBITDA did not meet expectations as we previously explained, We view the lower target as more of a delay in generating EBITDA into 2024. CapEx of $22,000,000 to $25,000,000 down from our previous $30,000,000 guidance due to construction delays.

Speaker 4

We expect the remainder of the original $30,000,000 guidance will be spent in 2024 to complete the expansion of our Maryland, Illinois and Missouri cultivation and processing facilities. That concludes my financial review and outlook. I would now like to turn the call back to John for his concluding remarks.

Speaker 2

Thank you, Renny. As our results illustrate, We continue to execute our strategic plan. I'm truly pleased with the progress the company has made despite regulatory and construction delays and increased competition. MerryMed still has one of the most conservative balance sheets in the industry, which has allowed us to accelerate our revenue growth faster than the overall industry. Looking ahead, we believe our top line growth will continue to outperform the greater industry.

Speaker 2

As Randy explained, our top line growth remains strong this year. Our margins did not meet expectations due to higher input costs, regulatory and construction delays, carrying costs associated with building several of the new assets so quickly and macroeconomic pressures on the consumer. That said, our new assets are ramping, which will lead to margin improvements in 2024. These new assets will continue growing sales allowing us to finally leverage the investments we made in personnel, infrastructure and growth over the past 18 months. In addition to our focus on growth and improving our financial results, we also take seriously our responsibility to be an industry thought leader.

Speaker 2

Last quarter, we were proud to call for the elimination of 280E through our staging of the Boston 280E THC party. We generated over 100,000,000 media impressions With that initiative, we'll let history determine if our stunt was a nudge that the Department of Health and Human Services needed to deliver Its recommendation to reschedule cannabis shortly afterwards. As you know, a Schedule 3 classification would mean the end to 280E, saving us and most other cannabis company's 1,000,000 of dollars in tax payments. Before I wrap up our call, as a diehard sports fan. I love watching the amazing postseason run of the Texas Rangers.

Speaker 2

The scrappy Rangers reminded me of how far Merry Maid has come these past few years. Like them, we were not considered the most as a top tier competitor. Like the Rangers, we have invested our money wisely, built a world class team and embraced the underdog role. We have put all these pieces together ready to be a champion among our peers. Looking ahead and 2024, which is a couple of months away, we are once again poised for a championship run.

Speaker 2

The heavy investment in the organization is substantially complete and we are ready to begin reaping the fruits of our labors in terms of accelerated revenue and profit growth in 2024 and beyond. I would like to thank all our employees for their continued hard work and dedication to helping MerryMed achieve our mission to improve the lives of people every day. In fact, over the past 12 months, our employees have helped to improve the lives of nearly 5,000,000 patients and customers with our product. Operator, open the lines for questions.

Operator

Thank you. Please be prepared to ask your question when prompted. Our first question today will come from Pablo Zonic with Sonic and Associates.

Speaker 5

Thank you. Good morning, everyone. Look, just on the guidance, particularly in terms of sales guidance for the Q4, right? That means based Your 9 months means 38.3 percent to 40.3 percent. That's minus 1% to plus 4%.

Speaker 5

Not to get too numerical here, But we're almost in mid November. That's quite a bit of a variance there. What are the levers for you to be at the high end or the low end there in terms of

Speaker 4

Pablo, hi, It's Renny. Thanks for the question. On the low end, we're seeing good uptick in Maryland wholesale and retail. And I think we're anticipating hopefully that trend continues. So that would be the low end of the scale.

Speaker 4

Like we mentioned, if Illinois sorry, if the operations in Illinois, the Gro operations and processing operation comes online in Q4, that's kind of the upside. So we're hoping that happens. We're going through the final regulatory approvals and we expect to hopefully have some production come out of there in Q4. So that's the upside on that range.

Speaker 5

Okay. Thank you. And then just staying on that point, just a reminder in terms of all your expansion plans and all these new assets you're talking about, What's coming through in the 4th quarter and what's still to come in the first half, I think at the end of 'twenty four? At the end of your prepared remarks, you mentioned something about the expansion in Missouri and other places. Just a reminder about all those new assets that should come through in the first half of twenty twenty four.

Speaker 5

Thank you.

Speaker 2

Good morning, Pablo. Thank you for joining us and thank you for the question. Yes, as Renny was just saying, our Illinois Cultivation Processing Center is having inspections and we hope to have at least the processing center open in the next couple of weeks and getting products into that state. We just opened up our 5th dispensary in the state in Casey. In addition to further growth, as you said, Missouri should be coming on sometime either late Q4, early Q1.

Speaker 2

Hopefully, it's just regulatory delays trying to get approvals still in Missouri. Then we are still finishing up our construction of our expansion in Maryland. We hope for that to be early 2024. We had some delays on supplies of materials. It's the parts that are important to be able to get them open as quick as possible for the demand.

Speaker 2

And then in Massachusetts, our expansion, so additional grow and a new kitchen, to help the demand in that state. Again, that would be 2024.

Speaker 5

Yes, that's great. Thank you. And just one last one. So based on the positive results in Ohio, how are you thinking or expanding there in terms of M and A? Results in Ohio.

Speaker 5

How are you thinking about expanding there in terms of M and A, particularly in terms of adding stores? Thank you.

Speaker 4

Yes, Pablo, it's Renny. Yes, definitely, we've always liked Ohio as a state and now we take it even more. And we continue to look for opportunities and our goal, we've stated all along is to be vertical in every state we're in. So we look for that opportunity in Ohio as well. We do have the 1 retail as you know, we're allowed 4 more.

Speaker 4

And so we're like I said, ongoing search for opportunities in that state to get us to a vertical position ultimately.

Speaker 5

Okay. Thank you.

Operator

And our next question will come from Andrew Semple with Echelon Wealth Partners.

Speaker 6

Great. Thank you. Good morning. First off on the margins, which came down this quarter, Despite the significant improvements we saw in revenue and asset utilization really across the organization, but especially in Maryland, wondering if there were any costs Associated with the ramp up of all those facilities you were going through just now, that would have resulted in increased costs without offsetting revenues. Was that a dynamic that impacted the margins this quarter?

Speaker 6

And if so, do you think you could get back some of that margin profile In subsequent quarters and into 2024?

Speaker 4

Yes, there's some impact for sure. The Ohio dispensary for sure, Illinois processing. So we did have some of those costs that hit the margin. And so will those come back? Yes.

Speaker 4

As those operations come online and the revenues starts to ramp up even more in Ohio and then Illinois starting in the processing area like we've mentioned, then the answer is yes. We would expect obviously some positive accretive income from those.

Speaker 6

Great. And then just thinking about operational spending for the next few quarters. Do you think you have all the operational infrastructure in place for the next leg of growth? We could see that Start to flat line somewhat or do you think that there will be additional investments needed to continue to grow business.

Speaker 2

Good morning, Andrew. Thank you for joining and thank you for the question. We've spent a lot of the growth money on our structure of the executive and mid level, but we still will need to hire as we expand into Ohio with the sorry, into Illinois with the cultivation and processing with some additional hires as we build out Missouri. But that's just operation people that were in our original forecast. But The major piece of the growth is all over for the executive team and mid level.

Speaker 2

So all those expenses should be flat or even coming down a little bit.

Speaker 6

Great. That's helpful. And last one for me just quickly would be on the CapEx guidance coming down. Is that reflecting scaled back investments or is that just drifting into 2024?

Speaker 2

That is really due to the fact of the delay of materials coming in and delay of the operations being completed. So as we go into 2024, I do see those completions and those dollars being spent early.

Speaker 6

Great. Thank you very much.

Operator

And our next question will come from Jesse Redmond with Water Tower Research.

Speaker 7

Good morning, guys. I had a question mainly related to gross margins. It seems like you saw more pressure this quarter And you talked about that coming primarily from Illinois and Massachusetts. So I'm curious, I guess, on two fronts, can you talk a little bit about what's Driving that strategy and then elaborate a bit more on the strategy to maybe try to recoup and if you need to go down on price a little bit or what else you can do to Tatarac, maybe some of those new stores opening that might be driving that competition.

Speaker 4

Yes. Thanks, Jesse, for the question. It's Reni. Yes, there's no question the competition is having an impact. And Tim outlined a number of initiatives, whether it's bundling and Some of the other things that he talked about, just some improvement in our marketing, our target marketing and that sort of thing.

Speaker 4

And We're seeing certainly the benefit of that in Massachusetts, and we'll continue to do that those types of things, but that will help us Recoup some of that loss revenue and get the average ticket up. So that's only part of the margin story though, right? We also talked about these delays are obviously having an impact on us and the inflationary pressures are We don't want to downplay those because we're certainly seeing that as everybody is seems to be. So those are other factors that gross profit. Now Will inflation come down?

Speaker 4

Will we start to recoup some of that? Not sure. What we can control obviously is what we do in terms of Hitting the competition head on and that's the type of stuff that Tim outlined.

Speaker 7

That's helpful. And do you see the competition continuing to increase in those markets? I know there's Much more social equity stores to be opened in Illinois and there's more stores opening in mass. So is that a trend that you see? Do you see the trend stabilizing and potentially see

Speaker 3

Thanks, Jesse. This is Tim. Yes, I mean, there are a lot more social equity licenses that have been issued, minimal around the areas that we have our retail operations, in specifically Illinois, bringing our manufacturing facilities online and bringing our award winning products with a lot of pent up demand in that state is going to help offset Some of our margins and capabilities to have a feather in our cap at our own dispensaries as we'll keep some of our specific brands like Betty's at our own dispensaries and not in the surrounding dispensaries and flood the market where we don't have operations. So we truly believe that will Bring customers back, bring more transactions to our facilities and help with our bottom line.

Speaker 7

And will that Illinois manufacturing primarily focus on edibles and specifically getting Betty's up and running first?

Speaker 3

To start, that's where we have focused in our Phase 1 build. Yes, we are focused on our lab and kitchen operations, Not just Betty's, our Bubby's has really taken a great trajectory in both markets that it's in. Our Vibations drink mix also. So we're going to be focused on our 5 high margin products out of the kitchen and really getting those across the state of Illinois. Our sales teams actually already hit the streets and has a Great traction with a lot of the big guys and smaller operators ready and willing for our products for their shelves.

Speaker 3

So we're excited.

Speaker 7

And last question on Illinois. Can you remind us of the What your best guess is now in terms of timing on the cultivation facility and when we might see a first harvest out of there?

Speaker 3

It's really been electrical gear and things that have held us back and I think we're just about over that hump. We're about a month out from completion on the Phase 2 for our cultivation. Barring any more issues with supply chain, we

Operator

and it appears there are no further questions at this time. Mr. West, I'll turn the call back to you for any additional or closing remarks.

Speaker 1

Thanks guys for joining us. If you have any questions, you know how to reach me. I'm at IR on Merry Maid and we are open for business for questions. Thank you very much.

Operator

This concludes today's conference call. Thank you for attending.

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Key Takeaways

  • Q3 revenue of $38.8M, up 14% YoY, with positive adjusted EBITDA for the 15th consecutive quarter and positive operating cash flow for the 4th year.
  • Maryland adult-use launch drove more than a 2x sales increase at the Annapolis dispensary, making it the company’s second-largest, and triggered expansion of the Hagerstown cultivation facility.
  • Expansion momentum continued with the opening of the 12th dispensary across five states, the Mount Vernon processing facility in Illinois receiving occupancy approval, and plans to double Illinois locations.
  • Non-GAAP gross margin fell to 45% from 48% a year ago due to higher input costs, supply-chain delays, and increased competition, though management anticipates improvements as new assets ramp.
  • 2023 guidance lowered to $148M–$150M revenue, $27M–$32M adjusted EBITDA, and $22M–$25M CapEx, reflecting delayed dispensary openings and margin pressures.
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Earnings Conference Call
MariMed Q3 2023
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