Grown Rogue International Inc. (GRIN) Earnings Call Transcript

Please note that today's call is being recorded. Before we begin, management's remarks and responses to questions may include forward-looking statements within the meaning of applicable Canadian and United States securities laws, including statements about guidance, expansion plans, proposed acquisitions, and future performance. These statements reflect management's current expectations and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially. Further information about these risks and assumptions is available in today's earnings release and the company's filings on SEDAR Plus and EDGAR. Listeners should not place undue reliance on these statements, which speak only as of today. Grown Rogue undertakes no obligation to update them except as required by law. Management may also refer to non-GAAP financial measures and ratios, including EBITDA, adjusted EBITDA, and adjusted EBITDA margin. This provides supplemental information. These do not have standardized meanings under U.S. GAAP and may not be comparable to similarly titled measures used by other companies. They should not be considered substitutes for GAAP results. Definitions and reconciliations of historical non-GAAP measures are included in today's earnings release, available at ir.grownrogue.com. Unless otherwise indicated, all financial amounts are in U.S. dollars. And now I will turn the call over to Obi Strickler, Chief Executive Officer of Grown Rogue. Obi, please go ahead.

All right, thank you very much. And thanks, everyone, for joining today. Some of you may be aware we're having what looks like a global outage in Outlook, Microsoft. Obviously, that shut down emails from the company today. So obviously, we got the press release out, we're having a conference call, all the filings are completed, just waiting on kind of email traffic to come back up and then we'll get those filed for the Qs and all the different components that are coming along with that. So, yes, thanks for your patience and a little bit out of our control. But we had another solid quarter in Q3 in the midst of, you know, executing on our ambitious growth plans this year. As you can imagine, you know, things are busy and a lot is going on for the organization. I wanted to take a few minutes to talk about some of the key milestones, you know, we've achieved since our last conference call. So, starting in Minnesota, you know, we pride ourselves on standing things up quickly, as time is money in so many ways. And in the case of Minnesota, it's even more important as we believe the market is significantly supply-constrained, you know, especially when it comes to indoor flower, let alone the craft quality indoor flower that we are building our business on. Construction is materially complete for the first phase, which will start, as we said in the past, with approximately 8,000 square feet of flowering canopy, that should be producing around 500 pounds, you know, of whole flower per month. Each of the five flower rooms is populated inside the facility, and we're scheduled for our first harvest at the end of November. And then with our crop schedule, you know, we'll be starting to harvest out of that facility effectively every two weeks, getting the team and our systems dialed in with the quality of our construction and the design that we put in place. Just super excited about our ability to get this facility up to our standards in short order and looking forward to starting our sales in January of 2027. New startups are always a scramble as usual, but excited about how the existing team and then the new team members we brought in are coming together with their planning and execution. As you know, in Minnesota at full capacity with our licensing, we can increase our flowering canopy up to 30,000 square feet, which we will obviously do in phases. We've begun starting kind of the internal design work for the next phase of that construction. That would take us up to probably the next phase of our growth, which was about 16,000 square feet of flower. Obviously, that'll depend upon executing on that work, you know, depending upon sell-through and the market demand, you know, but considering the undersupply situation, you know, currently in Minnesota, you know, what we're observing there, what other companies are talking about, you know, very excited about the potential in this market. Illinois, similar to Minnesota, really plays with how quickly the team pulled this together, just how nimble we've been to address the issues with taking over an already built facility. We're now several harvests in and excited about the initial quality and the response to our brands in the marketplace as we've begun selling, you know, back in October 2026. It's important to note that Illinois is—we look at this as a little bit of a slower build. It does not have the supply limitations, and we know we need to earn the shelf space in a market with larger, more vertical operators that control a significant portion of that market. Confident in our ability to be great partners, you know, both to the large players, you know, and the independents across Illinois, and, you know, very confident and believe strongly that we bring a great quality and value proposition, you know, to the customers across our, you know, kind of brand portfolio. New Jersey, I mean, continues to be a great market for us. And what we're learning there is really informing our practices in new markets. Packaged sales continue to be effectively 100% of our production, which has been one of our goals and mandates since the beginning. We continue to have more demand than production, which bodes well for the three additional flower rooms we are building to get to full capacity. This will add another 6,000 square feet of flowering canopy, which will translate at our kind of estimated yields to around 400 pounds per month of additional supply. We plan to populate these new flower rooms starting in December and then into the first part of the year, you know, to balance the new capacity, you know, against kind of our monthly sales and really targeting the upswing you see, you know, after the slow winter months coming into, you know, spring for 2027, things like that where the demand starts to pick back up. I think one important note, and there's a lot of data sources out there, we rely upon Headset, but Headset data shows us as the number 3 brand in the state, you know, across our 3.5-gram eighth category. And then when you include 7 grams into that form factor, the number 5 brand in the state across, you know, the various brands that we have in that market. Really exciting accomplishment for the team, and obviously it makes us very hungry to improve those rankings, you know, as we move into 2027. I'll let Josh talk a little bit more about New York specifically, but similarly want to highlight how quickly, you know, we mobilized resources to revitalize, you know, PharmaCann's Hamptonburgh facility. The team is pushing, and thanks to all their hard work, all 15 indoor flower rooms are already populated, with our first harvest scheduled for the middle of December. It's a monster facility, but at the speed at which the teams are executing, it's just been very, very impressive, you know, unlike Grown Rogue's kind of history, you know, we are not being incremental in New York with the amount of production that we're bringing online, which should be about 2,000 pounds per month, you know, of our high-quality indoor flower. And, you know, we got a lot of confidence in our ability to grow that based on what the team's doing already. And more importantly, get it packaged and into the market effectively, as we kind of navigate what the demand looks like there, the brands, you know, just the ethos of that market, you know, as we get our arms around it. Again, first harvest will be in December. We expect to start sales in kind of, you know, mid-late January, early February. But also wanted to highlight just the appreciation for the PharmaCann team, going through what they have over the last couple of years, but rolling with us through this massive effort that we're undertaking inside of New York. You find this, and we've talked about it before, but you know, team highlights, right? I just really want to take a moment to commend and thank, you know, our existing team for their hard work and stepping up over the last year. You know, we were running really hard even before New York, you know, was kind of announced and we decided to take this on. You know, obviously it was not on our bingo card this year, but it was, you know, too special of an opportunity to pass up. We have super high standards and take great pride in our flower and products. And I want to acknowledge that we are stretched a bit thin at the moment. But to a person inside of our team, that does not change our unwavering commitment and passion for producing great flower consistently. Of course, none of this would be possible without some really strong recent additions to our squad, you know, over the last few months, you know, coupled with, you know, individuals that've been with us for years and have really stepped into their new roles and are embracing, you know, kind of this new scale and opportunity that sits in front of us. In particular, I want to highlight Michael Johnson, who I've personally known for years. You know, we go way back and, you know, just never kind of been able to align on getting him to join, you know, Grown Rogue based upon his other roles, responsibilities, and companies he was working for, and then obviously where Grown Rogue sat. But getting him to come on board and lead New York for us has just been amazing. Michael brings deep industry roots and really, and most importantly, embodies our culture and our passion for excellence. Another recent addition to our team is Naya Gunnett, who joined us a few months ago as our corporate controller, and she's already providing like just a much-needed level of support to our accounting team, you know, just bringing a level of experience and knowledge that is going to be, you know, very critical during this period of growth for the company. Eamon, who has been instrumental for us the last year—you know, anyone on this call who's met Eamon, you just like his passion and intensity and knowledge just is without question. And it's one of the cool stories, you know, kind of inside of Grown Rogue in terms of how we've been growing the business, but also growing the people, you know, who have been with us for years. Eamon started with us 4 or 5 years ago as a grow tech, quickly moved up through the org, getting into fertigation, then became our director of cultivation in Oregon before recently being promoted to our national director of cultivation, you know, to support the rollout in our new states this year. And Eamon has just been a beast. You know, he was on the ground in Illinois for months as we set up that production. And then I think literally flew to New York within 48 hours of, you know, signing the first set of agreements and has been on the ground out there ever since. So just, you know, big thank you to Eamon and all that he's doing. The other person I want to highlight is Jordan Storms, goes by Jordy, you know, another kind of standout inside the org who I think started with us, you know, again, 3, 4, 5 years ago as a trimmer. And really it's just been driving, you know, the training and execution inside of our post-harvest practices and really getting into the, you know, the weeds for, you know, pun intended, of like, you know, with our trim teams, you know, the bucking teams, like how do they, you know, do that? And how do we spin up these new people under our standards to really preserve the, you know, the handling and the quality of our product? The list could go on and on, and I won't bore you guys with an hour of talking about our amazing team, but expect that to be a part of our calls going forward, just looking at what our team is doing and how they're performing. I want to leave everyone with just a little bit on where we're going. You know, it's kind of, I wouldn't say it's crazy because this is kind of the roadmap that we put in front of us, but you know, we're now operating a six-state footprint. And while we have a ton of execution to get right, it's pretty amazing and should have a material improvement in our financial performance in 2027. Whereas you'll see from our guidance, it reflects 50% revenue growth and about 100% adjusted EBITDA growth. I want to be clear, this has no contribution from New York yet, which, you know, time will tell, but based on what we've seen, based on the history there, arguably New York is going to become the largest market in our portfolio. As you've seen over the years with Grown Rogue, our foundation has been set, right? High quality, low-cost indoor flower production. Performance on those fronts in Oregon and Michigan speak for themselves. You can look at the numbers, you can look at the yields, you can look at the costs. But the real test for Grown Rogue is, A, can we translate that performance into our new markets, which we're very confident we will? But B, as we take that foundation and we really tie the brand and our engagement with our customer to that. And we've been talking more recently about that on our previous calls, we've been investing in it, you know, inside the company. But it's a big, you know, kind of continuous renewed focus on that portion of our business, really to get into, you know, how do our brands resonate? How does the customer view us? You know, do we live up to that consistency and quality that they can rely upon? And I think when we hit that, it's going to be a pretty amazing outcome. Our goal is always to become the leading independent flower company in the space, not necessarily the biggest, and we're well on our way, you know, the six-state portfolio, the fact that I think is, you know, potentially understated is that we control all of that production, which allows us to ensure the passion and quality standards that we hold ourselves to is mandated and just not requested from a licensing partner, you know, or some other process where we don't have that ability to just really ensure that quality and the genetics and the things that we do really well kind of come through. So very excited about that. You know, Sarah and I started Grown Rogue—it's kind of wild, you know, 10 years ago, just like a couple of weeks ago. And we have never been more excited about our team, our business, and the future than we are today. So super excited and appreciate everyone's kind of time and journey with us, and, you know, '26 has been a big year of growth. '27 is going to be a pretty amazing year for the organization. I'm just super excited for the team and what we're going to do.

And with that, I will pass it over to Josh. All right. Thanks, Josh. So on last quarter's call, I led with a story about a deal we got out in Massachusetts as a way of saying we're active, but disciplined. Sometimes timing is everything. The Friday we lost that deal was in May, and the very next Monday, I got a call about the opportunity I thought was the best fit for us all along, which is PharmaCann's New York operations. Like Massachusetts, we'd originally been outbid on New York too, but it was coming back to us with workable terms. As you can see from our August announcement, it's a fairly complex transaction, given the multiple parties involved in the regulatory environment in New York. But I want to start with the industrial logic because this gets right at why I joined Grown Rogue and where I see long-term value creation in the industry. From our perspective, New York's regulated market is undersupplied with quality indoor flower, mostly because there just isn't enough indoor infrastructure. The adult-use rollout prioritized outdoor and greenhouse growers initially, in many ways, at the expense of the original medical license holders, PharmaCann among them. That's left a regulated market that skews heavily toward manufactured products like vapes and edibles, which for those who know the market are highly competitive categories in New York. In indoor flower, we believe the illicit market is still dominant, and the operators with better indoor infrastructure in New York, among them GTI, Curaleaf, and Vireo, have started doing very well over the past several quarters. With more than 20 million people, plus a huge number of visitors, this is an incredibly deep consumer market, and it matched really well to our core competency of producing great flower. Another thing about New York is it has a large and growing number of dispensaries, more than 700 now, with a regulatory regime that's prevented heavy consolidation. We've come to some challenges around the number of customers and at times creditworthiness. But in that way, it also looks a lot like our oldest markets, Oregon and Michigan. We know how to serve a large number of smaller doors. In a market like that, retailers don't control the supply chain the way they do in more consolidated markets. And the last piece of the logic for us, which I'll come back to in future quarters, and it'll be just referenced, is the brand. Historically, we've been more of a sales-driven producer than a marketing-driven one, largely because of how Oregon and Michigan are structured. And that's a big part of why you've heard us talk so much about efficiency and low costs. That's shifting in New Jersey, where the brand is resonating. And as Obi just referenced, about everything we sell goes out as brand and pack and product. For us, though, the brand is really about sharing our passion for great flower with more people and putting the customer first. We think New York can be New Jersey on steroids for that. Tying back to August, a quick refresher on the structure in New York. We formed Grown Rogue New York, which we own 51% of, alongside a capital partner who put in $10 million of preferred equity for the other 49% and committed another $5 million term loan. I think it's roughly $12 million of estimated total project costs, including the purchase price and capital expenditures and working capital, and with a cushion called the contingency. Grown Rogue New York then signed the Goods and Services Agreement with PharmaCann of New York, which lets us support the operations in the interim, along with a secured loan of up to $9 million to fund the transition. That $9 million came out of the initial $10 million, and we became the direct tenant of Innovative Industrial Properties at the Hamptonburgh facility. The point of all that was to keep the business from shutting down while we finalized the purchase agreements and go to regulatory approval, and to do it with limited risk to Grown Rogue's balance sheet. Turning to where we are today, we're working through what I believe and hope are the final details of the purchase agreements. In August, we said 4 weeks, and it's taken longer than we anticipated. I now expect them to be executed by the end of this month, hopefully sooner, and then meantime, with the Goods and Services Agreement in place, we've been actively supporting PharmaCann New York's operations, including their 4 Verilife stores. As Obi mentioned, we replanted the Hamptonburgh facility with the first harvest expected in December. For context, before production slowed early this year, that facility was producing close to 2,000 pounds of flower a month, mapping to Obi's point earlier. On retail, when our agreement started, the Verilife stores were working through PharmaCann's inventory with very aggressive discounting and limited third-party products. We're basically converting inventory to cash as fast as they could while facing a shutdown. We've proactively restocked third-party products. Currently, that was a necessity since PharmaCann's in-house inventory was nearly gone, but it's also how we think about retail. Put the customer and the products they want first, rather than prioritizing our own vertical sales. We've also been working with PharmaCann to transition the point-of-sale systems, which is now largely complete. Overall, our expectations remain consistent with what we laid out in August. As a reminder, that included about $20 million in annual cost savings that we identified, which we expect to implement over the first 6 months and is in motion. It included the New York operations becoming after-tax operating cash flow positive within 9 months and after-tax cash flow from operations of roughly $600,000 a month within 18 months. Most importantly, we believe New York meets or exceeds our hurdle of returns on incremental investment capital of greater than 75%. We'll continue to update investors at the important milestones. The next legal step, as I mentioned, is executing the purchase agreements. Under the services agreement, we've already started the required regulatory disclosures, and we're hopeful we'll receive approval from the regulator in the first quarter of next year. To add to Obi's comments about being stretched, we're also building out our support teams. This is a heavy lift for what's historically been a very lean operation. We won't lose our entrepreneurial scrappiness, but we need to make sure we have the internal resources to properly support our local teams as they add value in their markets. Some of you have heard me say previously that I view headquarters and corporate as a tax on the local businesses we run. So we, on this call, need to do our part to add value. Last for me. And maybe this point goes without saying at this juncture, but my strategy and business development focus is entirely on using my experience and relationships to support the markets we're already in. We have a lot to digest and execute. And with that, I'll hand it over to Andrew.

Thanks, Josh. I want to start off by explaining the write-off we took this quarter for Rogue GVC in Illinois. This was largely an accounting decision as a result of, well, some of the unclear path forward with this asset. We made the strategic decision to pivot to the Dwight facility based on the speed and cost to get to market, and we still stand behind that. But this did leave Rogue GVC's facility and license on our balance sheet. It didn't really qualify as a discontinued operation or an asset held for sale. So the most appropriate accounting path forward was to record the consideration impaired, the license, and the many existing assets and the lease asset. We're currently assessing various options for monetizing what we can, and we'll update further when something materializes. Next, I want to highlight further to what Josh just stated, the heavy lift we foresee with the anticipated New York acquisition. I anticipate Grown Rogue will start consolidating PharmaCann New York upon execution of the purchase agreements, which as he stated, was imminent. This comes with some challenges for our back office. First, we're drinking from a fire hose to work with PharmaCann's existing people and systems. For Grown Rogue, this will include our first consolidation of retail and manufacturing operations. As Josh noted, we've already replaced the point-of-sale system to improve customer experience, but with that comes incremental accounting, procurement, and inventory workload. Secondly, PCNY does not have standalone back-office support and relies heavily upon PharmaCann's corporate team, which has been managing through the sale of their assets over a year and at this point are spread quite thin. We've already been in the process of augmenting the support structure, both inside and outside of PCNY. On the team side, we recently added a corporate controller, as will be noted, as well as some additional accounting and HR support staff. And we have some additional recruiting, both to support Grown Rogue's growth in the Midwest, but also in New York, as I just alluded to. There is a lack of dedicated New York support staff, and it is a sizable operation. I'll end by noting that I'm excited to take on these challenges and support our growth, having personal experience with the retail side of the industry and being a big believer in building around an Oregon foundation. I'm excited about the future and aware of the fact that this period of growth will bring us a number of challenges. With that, I'll send it back to Obi.