Ascend Wellness Holdings, Inc. (AAWHU) Earnings Call Transcript

Are subject to risks and uncertainties that may cause actual results to differ from historical or anticipated results. Information on the risks and uncertainties, please refer to today's earnings release and filings with the SEC and on SEDAR+, including Ascend's most recent annual report on Form 10-K and quarterly report on Form 10-Q. During today's call, management will also refer to certain non-GAAP financial measures, such as adjusted EBITDA. Reconciliations to the most directly comparable GAAP measures are included in the appendix to the presentation and in the company's earnings release. I'm pleased to introduce members of Ascend's management team joining us on today's call. Sam Brill, Chief Executive Officer and Director, will begin with an overview of the key operational developments during the third quarter of 2026. Roman Nemchenko, Chief Financial Officer, will then review the company's financial results for the quarter. Following their prepared remarks, we will open the line for questions.

The call over to Sam. Thank you, operator. Good afternoon, everyone, and thank you for joining today's call. On our last call, we said our growth strategy was delivering system-wide results, and we expected that momentum to continue through the back half of the year. It did, and I'm pleased to report a strong third quarter. Net revenue was $130 million, growing 3.1% sequentially and 4.2% from a year ago, marking a return to year-over-year growth, even as price compression remains a headwind. We also reached our 60-store target ahead of schedule, and that larger footprint is reshaping our mix. Retail sales grew to 75.2% of total net revenue, up from 73.5% last quarter. That top-line growth built on the strong platform we put in place is creating operating leverage and flowing through to the bottom line. As a result, adjusted EBITDA was $31.1 million with a margin of 23.9%. Cash flow from operations also improved. Our biannual interest payments typically pressure our first and third quarter cash flow. Even with the third quarter payment, cash flow from operations was positive and increased year-over-year. And we ended the quarter with $63.6 million in cash. Generating consistent cash flow remains a core priority for us, both in the near term and as we build the business for the long term. Before I get into the operational highlights, I want to provide an update on where things stand from a regulatory standpoint. On broader rescheduling, the DEA hearing concluded in July, and after a brief procedural pause, it is now with the judge for his recommendation. You won't guess at timing and the outcome remains uncertain, but in our view this is a procedural step rather than a change in direction and it does not affect the Schedule III reclassification of state-licensed medical cannabis, which has been in effect since April. The federal deadline to close the intoxicating hemp loophole moved from November 12 to December 11, and it's possible it could shift again, but our view hasn't changed. When those products come off the shelves, we expect a meaningful share of that demand to move into the regulated market. We are also watching closely as some states implement their own bans ahead of the federal deadline, which could bring similar benefits sooner as we saw in Ohio. Finally, in Massachusetts, voters rejected the repeal of adult-use cannabis with more than 75% voting no. It was the first time voters anywhere were asked to reconsider legalization, and the answer was clear. It is nearly impossible to get 75% of voters to agree on anything, so this result reinforced our confidence in the long-term durability of adult-use cannabis. Moving to our third quarter highlights, new doors continue to drive revenue. Total transactions grew 6% sequentially and 14.9% year-over-year, and we processed the most transactions of any quarter in Ascend's history. New Jersey is a good example. Interactions across our New Jersey doors, including partner-owned and operated locations, were up 18% sequentially and 37% year-over-year as our newer doors ramped. On innovation, we launched 103 new products this quarter after recording 199 in the second quarter. That's by design. We are focused on scaling our house brands and putting our energy behind the products that earn their place on the shelf, not just maximizing SKU count. And our brands are holding their ground. Per BDSA, Ascend held its position as the #2 brand house by sales and units across Illinois, New Jersey, and Massachusetts combined in the third quarter. New Jersey was a standout with our share up roughly 14% quarter-over-quarter. We also grew share across the rest of our footprint, except for Illinois, which was temporary and reflected the work stoppage at our Barry facility we discussed last quarter. Our 2026 priorities have not changed, driving retail densification, deepening our customer-first retail model, and advancing our CPG strategy. These pillars are key to driving meaningful free cash flow. The third quarter showed execution across all three pillars. I'm pleased to report that we reached our 60-store target ahead of schedule. We set that medium-term goal at the end of 2024 and have reported our progress against it every quarter. We ended the quarter at 56 stores, and with openings since quarter end, we now stand at 61 stores, including partner-owned and operated locations. In just over two years, we've grown from 39 stores to 61, a net increase of about 60%. Every retail door has widened our customer reach, reinforced our brands, improved our market share, increased vertical sales, and provided additional operating leverage to drive margins, EBITDA, and cash flow. We continue to open stores in New Jersey. On October 23, we opened our Ascend of Evesham dispensary in Marlton, which we own and operate with a social equity partner. We have two additional partner store opportunities in our New Jersey pipeline, which have been delayed by local and state regulatory challenges, but we expect them to open early next year. This would put us at nine locations in the state, up from four at the beginning of 2026. Importantly, our scale production capacity within New Jersey will be able to support vertical sales at all planned dispensaries. In Massachusetts, we're leveraging the state legislature's cap increase on retail licenses from three to six. After the quarter, on October 9, we began operating two dispensaries in Worcester and Shrewsbury under a consulting agreement while we await regulatory approval to close the acquisition. When it closes, we'll gain a vertically integrated medical license, which we expect to extend to all our Massachusetts stores and our cultivation facility in Athol. That means that every one of our stores in the state will be able to serve medical patients. We have scaled production in Massachusetts with plenty of capacity to support additional dispensaries. Today, our Massachusetts retail footprint spans 10 locations, including partner-owned and operated dispensaries that we support. Ohio remains one of our strongest performing retail markets. After the quarter, we opened our Lewis Center dispensary, our seventh Ascend store in Ohio, which celebrated its grand opening on October 9. In Illinois, our partner opened a new dispensary in Plano, which marks our 17th location in the state, including partner-owned and operated stores. Reaching 60 stores is a milestone, not a finish line. We're engaged in dozens of active M&A conversations, and our recent $11 million mortgage financing gives us non-dilutive capital to keep expanding our retail footprint beyond that target. Our customer-first strategy keeps compounding. We are consistently delivering a strong experience across our network with menus tailored to each market, knowledgeable store teams, a fast and convenient checkout, and compelling value, particularly for loyalty members. And customers are responding with new traffic up 19% across our full network and our average Google rating held at 4.66 across all stores. Loyalty members now account for 86% of our transactions. Our average ticket held steady, up slightly from the second quarter despite continued price compression. Ascend Pay was used by customers for over 11% of transactions in the third quarter and approximately 12% in September. In order to add convenience for our customers, we are also rolling out contactless tap-to-pay across the network. Sustained investment in our operations has meaningfully improved product quality across our portfolio over the last 18 months. As a result, our products keep getting better, helping our brands gain market share and improve our revenue per gram. Ozone held the #3 brand ranking by dollar sales and #1 in units across Illinois, Massachusetts, and New Jersey combined, and remained #2 in New Jersey. Ozone is also the #1 non-infused pre-roll brand in New Jersey. In recognition of our improved quality, we launched Ozone Signature across our core markets during the quarter. It's a new premium flower lineup of select strains that further differentiates our most coveted top-shelf flower. The vape flavor expansion we talked about last quarter is paying off for Simply Herb. Simply Herb vapes climbed up four spots to #8 across our core markets and reached #6 in New Jersey. Simply Herb also was voted Best Everyday Flower Brand at the Illinois Budtender Choice Awards. High Wired is now the #1 infused flower in New Jersey. High Wired is growing about twice as fast as the category. It is now the #2 infused pre-roll by sales and units in New Jersey. Our infused lineup now ranks #4 across our core markets. Honor Roll keeps climbing, moving up to #13 in non-infused pre-rolls in New Jersey. Later this quarter, we will launch new Honor Roll formats, including a premium glass-tip 1.2-gram single, a convenient 10-pack option, and a two-pack format. In edibles, we launched Effin' Tabs in October in New Jersey, Massachusetts, and Illinois, marking a new format for our brand. The line of precision-dosed THC tablets includes seven effects-led formulas combining minor cannabinoids with functional nutraceuticals. We also recently upgraded our Effin' Gummy portfolio with a new fast-acting formula offering quicker onset across the effects-based lineup. Lastly, I'm excited to share that Ascend will be taking its brands international for the first time. Through a capital-efficient licensing agreement with Atlantic Cultivation, a Canadian craft cannabis producer, we plan to bring select products from two of our flagship brands to Canada, High Wired Infused Pre-Rolls and Ozone Liquid Diamond Vapes. Products are expected to begin reaching shelves in the first quarter of 2027, with additional details to be shared closer to the launch. We are relentless in our pursuit to find every opportunity to improve the scale and efficiency of our facilities. Our cultivation team continues to execute by getting more out of every square inch of our facilities. Yield has climbed 21% since the first quarter of 2025 and has risen in five of the last six quarters. The improvements are not just quantity, the quality of our flower is getting better too. Premium flower output is up and premium flower per square foot is also up. Across our network, facilities also improved unit labor hour productivity in the third quarter compared to the first half of the year. Finally, on the capital markets front, our shareholders approved a reverse stock split on August 28. Thank you to everyone who voted. The approval gives our Board the flexibility to set the ratio and the timing of a split, and we intend to use it when an uplisting to a major U.S. exchange is permissible. To close, I'm proud of what the Ascend team delivered in the third quarter. We kept our momentum and we delivered on our goals we set, sequential growth, and margin expansion. Our 60-store target reached ahead of schedule and positive operating cash flow in the quarter that carries a significant interest payment. Our top-line growth is creating operating leverage and our platform is generating improved margins as a result. Cash flow generation remains a key focus, and it will continue to guide how we manage the business. As we head into the holiday season, our new stores will continue to ramp and we're ready for an anticipated shift in demand as intoxicating hemp eventually leaves the unregulated market. This happens without the people behind it and I want to recognize the exceptional Ascend team for another quarter of execution. With that, I'll turn the call over to Roman to walk through our third quarter financial results.

Thank you, Sam, and good afternoon, everyone. For the third quarter of 2026, the company generated $130 million of net revenue, which is an increase of $3.9 million, or 3.1% quarter-over-quarter. Retail sales for the quarter were $97.8 million, up by $5.1 million or 5.5% sequentially. New stores drove most of the increase, while the same-store portfolio followed third-quarter seasonality trends, although declining at a slightly lower rate than it did over the same period last year. Total revenue was $32.2 million, down $1.2 million, or 3.6% sequentially. The decline was driven primarily by the union strike in Illinois, which affected deliveries for the entire month of July. However, the facility has been back and operating at full capacity since early August, inventory has returned to pre-strike levels, and wholesale sales finished the quarter with the strongest month in September. Adjusted gross profit was $62.9 million, an increase of $4.6 million, or approximately 8%, while adjusted gross profit margin expanded to 48.4% from 46.2% in Q2. Adjusted EBITDA was $31.1 million, up by $2 million, or 7% from Q2. This is consistent with growth in sales and adjusted gross profit. Adjusted EBITDA margin also increased from 23.1% to 23.9% this quarter. Turning to our balance sheet, we finished the quarter with $63.6 million of cash, down $3.4 million sequentially. This net change reflects $5.4 million of positive operating cash flows, $8.6 million used in investing, and $0.2 million used in financing activities. Cash flow from operations includes the $19.1 million biennial interest payment made in July. Despite this payment, operating cash flow was positive for the quarter, compared with a negative $2 million in the third quarter of last year. Maintaining lean working capital, continuous cost management, and driving more sales through the retail channel were the largest contributors to the positive cash flow this quarter. Investing outflows of $8.6 million include $4.8 million of total CapEx and approximately $3.8 million of M&A-related payments. Total CapEx includes $2.1 million related to new store build-outs, while the remaining $2.7 million was used for projects across the cultivation and manufacturing facilities, as well as maintenance at existing retail stores. Financing outflows of $0.3 million mostly reflect finance lease payments. CapEx for the full year is still expected to be about $20 million, with $15.7 million already deployed this year. Most of the remaining CapEx would be allocated to new store openings, as well as maintenance CapEx for cultivation and manufacturing facilities. Additional capital will continue to be available for bolt-on acquisitions to continue driving our densification strategy. Subsequent to quarter end, we closed a series of mortgage loans for total proceeds of approximately $11 million at an 8.5% annual interest rate. The loans are secured by five properties, including two in Illinois, two in Maryland, and one in Massachusetts, and will mature in October 2031. By leveraging our existing real estate assets, we secured lower-cost, non-dilutive capital that we'll use to drive our densification strategies in markets where we see the biggest growth opportunities. Looking ahead to next quarter, we expect top-line growth of approximately 1% to 2%, driven by the ramp-up of new store openings and our M&A pipeline. This will be partially offset by seasonal discounting and continued price compression. We expect adjusted EBITDA margin to remain similar to Q3. The growth in retail sales will be a meaningful source of EBITDA and cash flow growth into 2027. Overall, we are encouraged by the financial results and opportunities our densification strategy has brought this quarter, as well as what we're seeing ahead. And we'd like to thank the entire Ascend team for their continued hard work and dedication towards executing on the strategy. We also appreciate everyone who joined this call and look forward to our next updates. With that, I will turn the call over to the operator for questions.

[Operator Instructions] Your first question comes from Kenric Tyghe of Canaccord Genuity. Please go ahead.

Thank you and good evening. If I could just lead off on the commentary around wholesale, a strong September post the Illinois strike and yet a very conservative-sounding commentary as relates to fourth quarter and the wholesale recovery. So could you help us reconcile and speak to the momentum in wholesale and how you are thinking about a potential return to growth in wholesale, both in the fourth quarter and as we look to 2027?

Thanks, Kenric. The wholesale decline is not, if you look at the BDSA rankings of our products, we are selling more products than we ever have in our history. And it's just moving from the wholesale channel to the retail channel. So we are gaining more vertical share as we open up more stores. And so the store additions have really shifted a lot of the wholesale revenue into retail. So it's reflected more in the margins and the margin improvement that are in the numbers. And that's by design, we're not trying to move things out of, we're trying to sell things in wholesale rather that we want to sell. We don't want to be forced to sell because we have excess biomass coming out of the facilities. And by expanding the retail footprint, we are lessening our dependence on wholesale in order to be able to sell what's coming out of the facilities and gain a higher margin as a result and be much more competitive on the wholesale shelf with those products that we think really stand out because they move and because customers want them and the independents love them because you're getting a great price for products that don't stay on the shelves very long. And that's really what we're focused on. We're focused on branding that actually sells itself and being able to do that is through that new mix of more retail and controlling that channel and really controlling what we put out for wholesale. So as we improve our yields, which we have, and we hope to continue to do that into next year, we'll have more biomass, but we'll see if that can grow faster than we can grow our store count. Does that make sense?

That's great. Thank you. And then just with respect to your Q4 guide, you've got sort of a 10% increase here, let's call it in retail, in doors. Granted, there's obviously a curve to that ramp. So help us perhaps reconcile the 1% to 2% top line, given that increase in doors, even allowing for the ramp. I mean, that implies some very marked or even more marked than typical promotional pricing pressure in the fourth quarter.

Yes, I think we're trying to take that into account and predict where price compression will be. People get extremely promotional in the fourth quarter, especially with wholesale as the year ends, and they're trying to move as much out of, so it doesn't age, they're trying to move as much product out of wholesale as they can. And we've seen this year after year, where especially in December, you see a lot of pricing pressures, and we're trying to just take that into account and be conservative but realistic given what we've seen historically. I get that. They are new stores. New stores typically take more than a quarter to ramp to real levels where they're contributing. But we should see more of that, I think, in Q1 versus Q4 in terms of impact.

Fair enough. And if I could just squeeze in one more quick one, your step up in G&A spend this quarter, I think it was up quite markedly. Just in the context of your fourth quarter guide, that would imply that you see a normalization of G&A spend and a sort of a pullback in G&A margins. Can you just help us reconcile the cadence of spend in the quarter and give us some comfort around or some indication as to how you are thinking about run-rate SG&A in the quarter and going forward?

Yes, no, I'll take this one. So I think the largest increase really had to do with the incentive comp accrual. So we did take a $2 million charge in Q3 that was substantially less in Q2. So when you look at SG&A normalizing for that accrual, I think you're pretty consistent. When retail is a percentage of sales, it's also up. And so SG&A typically moves up with that. That's as you're paying for rent and comp associated with that top line. But I do think incentive comp accrual drove the largest portion of that increase quarter-over-quarter.

Thank you. That's great. Congrats on the quarter. I'll get back in queue. Thank you.

Your next question comes from Ben Stonkus of Haywood Securities. Please go ahead.