Ascend Wellness Holdings (AWH) discussed its third-quarter financial performance and strategic initiatives during its earnings call, emphasizing a plan to optimize assets and reduce costs by $30 million by 2025. The company, led by CEO Samuel Brill (AS:BRIL), President Frank Perullo, and CFO Roman Nemchenko, reported flat retail revenue at $94 million but saw a slight increase in net revenue to $141.6 million year-over-year.
AWH is focusing on increasing profitability through vertical integration, with a 52% penetration rate for in-house products, and the launch of a new edibles brand, Effin'. Despite competitive pressures, AWH remains optimistic about the cannabis industry's growth and its own strategic initiatives, including the opening of at least 20 new dispensaries across key states.
Key Takeaways
- AWH targets a $30 million cost reduction by 2025, with savings split evenly between SG&A and COGS.
- Retail revenue held steady at $94 million; net revenue saw a slight year-over-year increase to $141.6 million.
- The company launched Effin', an edibles brand focused on minor cannabinoids, and aims for 55-60% verticality in retail.
- AWH opened a fifth dispensary in Pennsylvania and tripled retail sales in Ohio following the launch of adult-use sales.
- Adjusted EBITDA was $25.1 million, with $65 million in cash and $221 million in net debt by quarter's end.
- For 2025, AWH plans to focus CapEx on new retail builds and modest cultivation improvements.
Company Outlook
- AWH plans to open at least 20 new dispensaries, with ongoing development in Michigan, Pennsylvania, Ohio, and New Jersey.
- The company anticipates flat or slightly declining revenue and adjusted EBITDA in Q4 due to competition and pricing pressures.
- A significant lawsuit regarding cannabis rescheduling set for a hearing on December 5, 2024, could impact historical tax obligations.
Bearish Highlights
- Competitive challenges in several states have led to flat retail revenue.
- Adjusted EBITDA declined due to shifts in sales channels and increased operating expenses.
Bullish Highlights
- Successful launch of adult-use sales in Ohio with retail revenue tripling.
- Wholesale growth in New Jersey and Massachusetts contributed to the slight increase in net revenue.
- The company maintains optimism for a compound annual revenue growth rate of over 10%.
Misses
- AWH expects Q4 revenue and adjusted EBITDA to be flat or slightly declining.
- The company faces advertising restrictions and unavailability of popular products in Ohio, affecting performance.
Q&A Highlights
- The earnings call concluded without further questions, indicating potential investor satisfaction with the provided updates and outlook.
Ascend Wellness Holdings, under the ticker AWH, remains focused on strategic growth and operational excellence. The management team is optimistic about the future, despite current competitive pressures and the need for cost-cutting measures. The company's strategy to focus on high-margin products and increase vertical integration appears to be a key driver for future profitability and market share expansion.
InvestingPro Insights
Ascend Wellness Holdings (AWH) faces significant challenges as reflected in its recent financial performance and market position. According to InvestingPro data, the company's market capitalization stands at a modest $105.07 million, indicating its relatively small size in the cannabis industry. This aligns with the company's focus on strategic growth and operational efficiency mentioned in the earnings call.
The company's revenue growth of 22.77% over the last twelve months, as reported by InvestingPro, supports AWH's claim of compound annual revenue growth exceeding 10%. However, this growth comes with challenges, as evidenced by the negative earnings per share of -$0.34 for the same period. This data point correlates with the company's expectation of flat or slightly declining revenue and adjusted EBITDA in Q4, as mentioned in the earnings call.
InvestingPro Tips highlight that AWH's stock has taken a significant hit recently, with a 32.52% decline in the past week and a 45.63% drop over the last three months. This volatility aligns with the competitive pressures and pricing challenges discussed by management. Despite these setbacks, an InvestingPro Tip suggests that management has been aggressively buying back shares, which could signal confidence in the company's long-term prospects.
Another relevant InvestingPro Tip indicates that AWH's liquid assets exceed short-term obligations, which may provide some financial flexibility as the company pursues its cost-reduction strategy and expansion plans.
For investors seeking a more comprehensive analysis, InvestingPro offers 14 additional tips for AWH, providing a deeper understanding of the company's financial health and market position.
Full transcript - Ascend Wellness Holdings Inc (AAWH) Q3 2024:
Operator: Good morning, and thank you for standing by. Welcome to Ascend Wellness Holdings Third Quarter 2024 Earnings Call. I'd now like to hand the conference over to your first speaker today, Rebecca Koar, Executive Vice President of Investor Relations and Corporate Affairs. Please go ahead.
Rebecca Koar: Good morning, and welcome to AWH's earnings call for the third quarter of 2024. The presentation that accompanies this call can be found on the Investor Relations section of our website. Before we proceed, I would like to remind you that the following discussion and presentation contains various forward-looking statements or information. These forward-looking statements or information are subject to risks and uncertainties that may cause actual results to differ from historical or anticipated results. For more information on these risks and uncertainties, please refer to Slide 2 of this presentation, today's earnings release and our SEC and SEDAR filings, including our most recent report on Form 10-K. During today's call, we will be referring to non-GAAP financial measures such as adjusted EBITDA. Reconciliations to the most directly comparable GAAP measures are in the appendix to the presentation and in our earnings release. On today's call, I'm pleased to introduce the Ascend management team, starting with Sam Brill, Director and Chief Executive Officer. Sam will outline our key financial priorities and provide early insights into the next stage of Ascend's journey. Also on the call is Frank Perullo, our co-Founder, Director and President. Frank will share updates on our operational plans and highlights from the quarter. And lastly, Roman Nemchenko, Chief Financial Officer, who'll review our financial performance for the quarter and present our outlook for Q4. With that, I'll hand it over to Sam to talk more about the next chapter in the Ascend journey.
Samuel Brill: Thank you, Rebecca. I'd like to take a moment to thank the Board for the confidence they've placed in me. I'm fortunate that Ascend already has a seasoned and highly capable team in place to help me guide the company through this next chapter. For those of you who may not know me, I led one of the early lending rounds in Ascend and have remained a steadfast investor and supporter ever since. Prior to joining Ascend, I spent the last 7 years running a private equity fund, where I focused on enhancing the performance and success of my portfolio companies through strategic planning and driving operational efficiencies. My firm at the time invested hundreds of millions of dollars in the cannabis sector, which has given me a deep understanding of this ecosystem and fully aligns me with our investors' interest. Since Ascend was founded in 2018, it's been in hyper growth mode. We were building a plane while flying it, so to speak. Our key facilities are now complete, so it's time to take a step back and focus on optimizing those assets for sustainable and meaningful cash generation. Strengthening our foundation and building resiliency is especially important given the current market dynamics. As part of these efforts, we launched a series of cost savings initiatives and are committed to reducing expenditures by $30 million in 2025. While we anticipate some of these savings will be offset by pricing headwinds and increasing competition, we are pleased with the progress we've already made. We have three key financial objectives. First, improve margins and profitability. We must bridge the gap between our margins and those of our MSO peers. We have great assets, but we have yet to generate the margins we're capable of. We must now shift our focus to utilizing those assets more efficiently by optimizing our production and product development to meet new minimum margin thresholds, while preserving a robust selection of attractive products for our customers. Second, drive vertical sales through continued densification. We achieved the highest return on our manufactured goods by selling them through our retail channel, and we have some of the best brands. Therefore, we must continue our densification strategy to build internal demand for our products and improve verticality. Densifying and achieving scale in our key markets will continue to be a core tenet of our strategy. We must continue to pursue these opportunities to achieve better margins from our production. We plan to open at least 20 new doors in the midterm. We have 6 dispensaries in development, including our 8 in Michigan, 6 in Pennsylvania, 3 additional in Ohio and our first partnership dispensary in New Jersey. In Illinois, we support 2 partnership dispensaries, and we plan to expand to support 8 more. In New Jersey, we completed our first partnership arrangement, and we plan to add up to 6 additional partners in the state. This model is mutually beneficial for us and our social equity partners, and we will continue to explore ways to duplicate it in other markets. Third, deliver sustainable cash flow generation. We have made meaningful progress in cash generation over the past 2 years, but we must be more agile to create a financially resilient organization. To that end, we've already taken significant cost-cutting steps, targeting at least $30 million in reduction. As we move forward, the team will be hyperfocused on driving results in these three categories. Let us move to Slide 5 to discuss the key highlights from Q3. The end of Q3 was a time for rolling up our sleeves and focusing on our new financial objectives, particularly the cost and transformation initiatives. Some of the work we are doing will not translate into financials for a couple of quarters, specifically, cost incurred in production and cultivation that will help reduce the cost per unit in future sales, and we plan to rationalize inventory levels in certain markets. Despite the cleanup work, there were several highlights in the quarter. Adult-use sales started in Ohio, and we outperformed the market with retail revenue up over 3x. We also opened our fifth dispensary in Pennsylvania. The success in Ohio contributed to modest sequential gross margin improvement in the quarter, despite some noise, which Roman will detail. We completed the leadership transition management to a tactical lean team focused on controlling costs, and we realigned our workforce throughout the organization. Lastly, the rule-making process to formally reschedule cannabis from Schedule I in the Control Substance Act to Schedule III remains underway. Despite frustrating delays, a formal hearing is expected to occur in Q1 of 2025. It is clear what the majority of Americans want, and we continue to be optimistic about the ultimate outcome. Moving on to the David Boies lawsuit for which we are a supporter. We are very pleased that the First Circuit Appellate Court took the unusual step in this case to hear oral arguments. The case will be heard on December 5, 6 months ahead of plan. Regardless of our scheduling, we are looking forward to seeing this case through to the end. A favorable resolution could have meaningful implications, particularly around historical tax obligations. As I've gotten into the weeds over my first few weeks, I remain a strong believer in the industry and specifically Ascend. The industry holds promise. Projected compound annual revenue growth rate for the industry are forecasted at over 10%. About 75% of Americans are living in states that have legalized medical programs, and cannabis consumption has officially begun to outpace alcohol. Ascend stands out with several core strengths, including superior footprint. Our industry-leading revenue per dispensary demonstrates our ability to identify great locations in premier markets. Experience. Our strong Net Promoter Score indicates that our customers not only choose our products, but also enjoy their experience with us. Strong brands. We are proud to be a top 3 brand now by sales in our 3 biggest markets. Our Ozone brand holds the #1 spot by units in New Jersey, Massachusetts and Illinois combined. And Simply Herb ranks #1 in Massachusetts by sales. Production capabilities. We have over 255,000 square feet of primarily indoor cultivation, and we produce a wide range of quality products. This is exemplified by our cultivation team in Illinois as they delivered a 44% THC potency level for our Butterstuff strain last quarter. Distribution. We have amassed a comprehensive distribution network. Ascend has over 80% door share in each of our primary wholesale markets. We believe there's an opportunity to further leverage our impressive distribution capabilities. Each of these key trades positions Ascend for its success, yet Ascend trades at a noticeable discount to its peers, representing a compelling opportunity, which keeps me excited as we refine our focus and prioritize cash generation. I will now turn it over to Frank Perullo, President and co-Founder. He has remained with the business leading various functions and has led many of our successes since day 1. Frank leads Ascend's day-to-day operations and has hit the ground running in his new role. He will detail some of our key operational initiatives and the performance of the business beginning on Slide 7.
Frank Perullo: Thank you, Sam. Good morning, all. I am pleased to be here to report on many of the initiatives that we have begun to institute to optimize our operations and strengthen our business. As Sam highlighted, we're entering a new chapter focused on the fundamentals, caring for the customer first and driving operational excellence, while sustaining steady, purposeful growth, albeit at a more moderate pace. To achieve this, we're directing our efforts into three operational categories. The first is run. We must run our base business but better. We will achieve this in a variety of ways, much of which we have already begun to implement. To start, we reviewed and rightsized our labor force. As an example, at our retail stores, we implemented a dynamic labor model. This dynamic model also automated scheduling to align staffing levels with business demand, ensuring we maximize efficiency by dynamically staffing our stores, avoiding unnecessary costs during slower periods, while ensuring the best experience for our customers. Next (LON:NXT), we ensured we realigned the incentive structures to better match our business goals. If you recall, last quarter, we had a meaningful gross margin sequential decline partially due to an excessive discounting in Massachusetts. Aligning incentives, combined with robust but necessary controls, are part of the efforts to run our base business but better. Another matter by which we are working to run our base business but better, prioritizing product supply or sales channels with the highest profitability. Ensuring that inventory is congruent with demand and that each product is routed according to the highest profitability profile will enable us to run a more efficient and predictable business. Moving to transform. Our concentration here is on meaningful change to reinvent the ways we serve our customers. By identifying opportunities to modernize and find new efficiencies, we'll be able to elevate the customer experience and meet their needs with agility. We have begun efforts to launch an enhanced e-commerce platform with a new vendor that will cater to the customer experience. In addition to this, we are revamping our loyalty program and focusing on gaining store experience to transform the customer journey and further incentivize them to shop with Ascend. We also intend to transform the way we produce products. We are investing in automation, controls and better equipment to reduce production and yield variability, enhance consistency and unlock lower cost of goods. Lastly, we are transforming our product offering, ensuring we rationalize low-margin SKUs and brands to increase production capacity for the highest margin Ascend branded supply. We still intend to rely on our brand partners to enhance our offering in many cases, but we don't need to be fully relying on them. As Sam mentioned, we need to put our best foot forward and prioritize the highest value propositions. Lastly, the grow bucket. We continue to set the stage for sustainable growth by leveraging our existing infrastructure and strengths. By carefully balancing growth with our reinvestment in our core capabilities, we're positioning Ascend to capture emerging opportunities and scale effect as well. A clear example of this is our densification strategy. Lastly, we will grow by way of expanding our product offering to where it makes sense. Just last month, we launched Effin', our first edibles-only brand formulated with blends of minor cannabinols, including THCV, CBN and CBG, among others, designed to give customers targeted experiences. This 3-pronged approach enables us to sharpen our focus, streamline operations and unlock new avenues for growth, all while keeping our customers at the center of our mission. These operational drivers, combined with the Ohio adult-use flip, potential Pennsylvania flip, further densification and increased verticalization keeps me excited about the path forward and possibilities at Ascend. As we transition to the performance of the business in the quarter, it's important to remember that each state business has its own market dynamics at play. As is the case of these markets, they are often supply constrained at the outset of adult use and then take a leveling off period when supply catches up to demand as new entrants enter the field. Right now, this is translating into market tailwinds in Ohio, but headwinds in Illinois, New Jersey and Massachusetts. We are also focused on building a leaner and more cost-conscious organization to help us weather the storm when market dynamics are not in our favor. Resiliency is key in emerging markets, and we are repositioning ourselves to be highly resilient and a nimble company. Let's move on to Slide 8 to discuss retail updates from the quarter. During the quarter, we maintained flat retail revenue at $94 million, despite facing intensified competition in New Jersey, Illinois and Massachusetts. We celebrated the opening of our fifth dispensary in Pennsylvania in Whitehall, while also continuing to ramp our operations and recently opened Monaca and Cranberry, Pennsylvania. A major highlight this quarter was the transition of 5 Ohio dispensaries to adult use. Although the broader Ohio market has slightly underperformed expectations, Ascend stores has significantly outpaced, with retail sales across Ohio tripling on average post transition and the Cincinnati location seeing as much as a 12-fold increase. I wanted to highlight our AWH penetration percentage for the quarter, increasing asset efficiency and driving a larger share of our revenue from in-house products remain key priorities. We're focused on achieving this growth thoughtfully, ensuring our customers continue to enjoy a range of brand choices. In alignment with our strategy, we are actively refining our purchasing to meet evolving customer demand. This quarter, we've begun to make significant strides in enhancing our vertical integration, reaching 52% AWH penetration for the full quarter, with even stronger results in the initial months following the quarter. Overall, while there is still work ahead, I'm optimistic about our industry-leading retail store performance and the strong pipeline of location in development. We're aggressively pursuing the partner approach and expect to announce several additional partner stores in the next quarter. Let's move to Slide 9 to discuss the wholesale business in the quarter. Over the past 6 quarters, we have achieved consistent growth in wholesale revenue. This quarter, however, we made a deliberate shift to prioritize profitability over growth. While there's still progress to be made, we've begun to reduce the margin pressure in Massachusetts wholesale where we have migrated the portfolio to higher-value products. Third-party wholesale revenues are on a modest sequential decline, impacted by reduced revenue from New Jersey and Massachusetts. We recognize there's more work ahead, especially as we continue to address margin challenges and work through our inventory of lower value products. Even with a more measured growth approach this quarter, we achieved a 73% year-over-year increase in third-party wholesale channels, as increased retail competition drives demand for our products through wholesale channels. Our brand penetration remains robust across our key states, and our next priority is to expand shelf space within these established stores to strengthen our market presence. Further, despite increased competition, we either held or gain market share. This quarter, we've shifted marketing and production to emphasize products and brand with the strongest margin profiles. As part of this strategy, we're refining our product lineup, trimming some offerings and launching new high-potential products. For instance, Effin' edibles, which launched just after the quarter as previously mentioned, has seen strong early success, debuting as the #1 edible brand in our retail network in Illinois and Massachusetts during its first week. Alongside these brand adjustments, we're also investing modest capital and improvements to enhance yields and reduce variability, which supports our goal of generating consistent, high-quality product offerings that align with customer demand and margin objectives. To achieve our long-term goals, it is essential to minimize disruptions and address any operational challenges at our production facilities proactively. We are deeply focused on this. implementing safeguards designed to mitigate impact and maintain steady production as issues arise. I will now turn it over to Roman Nemchenko, who was appointed Chief Financial Officer. Roman will discuss our Q3 financial performance and near-term expectations. Roman has been with the company since the early days as our Chief Accounting Officer, building out the company's accounting and financial operations from the ground up. Roman played a critical role in leading Ascend through its initial public offering, navigating numerous M&A transactions and ensuring our compliance with tax regulations and U.S. Securities and Exchange Commission requirements. I am pleased to work with Roman as our Chief Financial Officer.
Roman Nemchenko: Thank you, Frank, and good morning, everyone. As mentioned earlier, I've been with Ascend for over 4 years. During this time, I had the privilege to support the company through some of its most critical phases and will continue to do so in its expanded role as the CFO. With that said, let's dive into our Q3 performance. Total (EPA:TTEF) net revenue for Q3 was $141.6 million. This represents a net 0.3% increase year-over-year, 5.7% of which is from our wholesale third-party sales offset by a 5.4% decline in retail. On a quarter-over-quarter basis, net revenue increased by 0.1%, 0.6% of which is from growth in retail, offset by a 0.5% decline in third-party wholesale. The net year-over-year increase was driven by third-party wholesale growth in New Jersey and Massachusetts, new and existing stores in Pennsylvania and Ohio, adult-use flip in Ohio and the addition of 3 stores in Illinois, 2 of which are partners stores. This growth was partially offset by retail declines in New Jersey and Illinois. The net quarter-over-quarter growth was mainly driven by adult-use flip in Ohio, the ramp-up of the 2 partner stores on Illinois and growth in Pennsylvania from new and existing stores. This was largely offset by retail declines in 4 major markets. Our Q3 adjusted EBITDA was $25.1 million. This represents a 15% year-over-year and 11.4% quarter-over-quarter decline. Adjusted EBITDA declined year-over-year due to a shift in sales channel mix, with a lower percentage of revenue coming from retail this quarter as well as an overall increase in operating expenses year-over-year. Adjusted EBITDA declined sequentially as our prior quarter benefited from the reversal of certain compensation-related estimates and additional marketing spend in Q2. Let's move on to discuss cash and the balance sheet on Slide 12. We ended the quarter with $65 million of cash, $221 million of net debt. We generated cumulative cash flows from operations, which represents the seventh consecutive quarter of positive operating cash flows. Included in this total is a $2.5 million portion of the earnout payment for Ohio acquisition as well as $2.8 million of refinancing costs required to be presented in operating activities under U.S. GAAP. Q3 net cash used in investing activities was $11 million. This includes approximately $5 million of CapEx used to support new dispensary builds and the various improvements of our existing cultivation facilities. The remaining $6 million was used to close certain M&A transactions. Q3 net cash used in financing activities was $9 million. This includes the remaining $5 million portion of the Ohio acquisition earnout payment and approximately $4 million of debt issuance costs related to refinancing. Looking ahead to Q4, we anticipate both revenue and adjusted EBITDA to be flat or slightly down sequentially. On the top line, we expect to benefit from a full quarter of adult-use sales in Ohio, alongside other key retail initiatives. Some of the cost management actions should also begin to positively impact Q4 EBITDA. However, these gains will be partially offset by ongoing competition and pricing pressure in markets like New Jersey and Illinois. In closing, I would like to reaffirm our commitment to increased financial oversights of our operations as we look to strengthen our balance sheet and deliver on cost savings and revenue-generating initiatives discussed earlier on this call. I'm confident that with our hands-on founder mode management team, we are well positioned to build a sustainable path forward, while navigating a more competitive market landscape. With that, I will turn it over to the operator for questions.
Operator: [Operator Instructions] Your first question comes from Frederico Gomes from ATB Capital Markets.
Frederico Gomes: First question on the margin gap that I think you mentioned, you have some of your peers and you have several initiatives to bridge that gap. So just curious, given your size, your footprint, your sales mix, what's the EBITDA margin level that you think would mean that you have achieved your goal and you have been successful in optimizing operations?
Samuel Brill: Frederico, thanks for the question. The margins are a key focus for this group, and we do trail our MSO peers by a pretty significant margin, and that's the primary focus. And we believe that we're right now in the bottom quartile, I believe, in all the MSOs, and that's just not acceptable. We're never going to be, I think, a top quartile company with the way we're structured and what our business plan is. But there's no reason we can't be in the middle of our peer group with the work that we're doing.
Frederico Gomes: And then my second question on the wholesale side. So obviously, excellent growth year-over-year, but a bit down sequentially. And I think you also mentioned that you want to increase verticality. So how do you see growth in wholesale heading into 2025? And I guess, the second part of that question is, which markets are more attractive to you from a wholesale perspective? Where do you think you have the highest upside?
Samuel Brill: So wholesale is going to be mainly driven, I think, as you see new store growth within each market. So when you see a bigger hockey stick when it comes to additional store additions, we're going to benefit from that. It's more doors to sell into. Like we said, it's -- we're 80% door share. And in some of our markets, we're significantly higher. So we expect to be able to capture a lot of that going forward. So I think that will probably be the biggest driver. Again, the biggest difference is we're going to be focused on the SKUs that generate the highest margins. We're not selling low-margin SKUs anymore. So we're really shifting our focus in the wholesale to be more margin focused with the market demand. So that really is what we're doing different going forward.
Frank Perullo: And Frederico, if I may add, I think the strongest places that we can continue to grow our core markets, Illinois and New Jersey, particularly, where we still have some runway. We increased our yields and efficiencies at our cultivation sites. And as new stores open up, we think that the growth in wholesale will help offset, either price compression or retail declines that our peers and we are seeing. Pennsylvania also is a state where we have some runway and some room to grow as well.
Operator: The next question comes from Luke Hannan from Canaccord Genuity (TSX:CF).
Luke Hannan: I wanted to dig into the $30 million cost savings target that you guys have put out there. I guess, first question on that is, how much of that $30 million has been achieved as a result of the headcount reductions that you've done thus far? And then can you help us frame up, of that $30 million, how much is going to come from those labor efficiencies? How much is going to come from other OpEx? Is that all going to be felt within the gross -- or the SG&A line? Or is there going to be a split between gross margin and SG&A? Can you just help us think through that from a high level, please?
Samuel Brill: Sure. Great question. So about half of the $30 million will be in SG&A and the other half is going to be in COGS. About 1/3 of the actions that we took were -- in the first 60 days, so that's what you saw in the headcount reductions. And then we're addressing the rest now. So the savings will continue in Q4, and you'll see the real benefit of it over the course of 2025. So I would just note again that it takes some time to cycle through into the numbers because we're still working through the legacy COGS that we had in the first half of the year. So you're really not going to see a lot of that in Q4. But hopefully, we'll start to see some green shoots in Q1 and thereafter.
Luke Hannan: Okay. And just a follow-up and a clarification on that. That $30 million savings, is that -- should we be thinking about that? I know I appreciate that you guys said in your prepared remarks that there is going to be lots of puts and takes. It's not going to be $30 million that drops entirely to the bottom line because there's going to be some pricing headwinds, of course, and other things going on within the business. But should we be thinking about you guys, if there is a situation, all else equal, and next year looks similar to this year, except for that difference in cost savings? Is that $30 million captured over the course of the entire year? Or is it that you expect to hit a $30 million cost savings run rate target at some point throughout 2025?
Roman Nemchenko: Yes. No, thanks for the follow-up. We do expect to see $30 million over the course of the year. A lot of that is driven by timing. As Sam mentioned already, we took action on a significant portion. And as our cost basis fluctuate, right, and improve over this quarter going into next year, we should see benefits both in gross profits and EBITDA.
Operator: The next question comes from Russell Stanley from Beacon Securities.
Russell Stanley: Just around verticality, I think Frank mentioned the importance of being thoughtful and optimizing revenue from your own brands, while ensuring you still have third-party product variety. I'm wondering if you can talk to where you think the effective max is for Ascend. I understand it would vary state by state. But is there a company-wide number or range that you can share where you think you can get to?
Frank Perullo: Thank you, Russell, for the question. I think having a balanced approach for us has always been the goal. We're shooting for 50%. We've achieved 50%. And I think we want to continue to get to a higher number. I would put it generally between 55% and 60%, but still giving the customer the choices and the retail experience we want to ensure. So I think we have to strike balance between having the right assortment and driving our products through our doors and capturing the margin where we can. So that's the approach we're going to take, while trying to drive up incrementally our verticality in our retail stores.
Russell Stanley: And for my follow-up, just on Ohio, congrats on the lift you've seen obviously at the -- arguably the highest I've seen, I think, this earnings season. But I'm wondering if you can talk to how much of an additional lift you might expect to see once the actual adult rules -- or adult use rules are finalized and implemented given the hindrance that the current structure in process.
Samuel Brill: Yes. So Ohio, we're still excited about Ohio. I don't think we've really seen what Ohio is capable of to date, mainly because you can't advertise, and many of the most popular form factors are not available, specifically pre-rolls. And once we make those changes, I think you'll see a nice lift in Ohio. It's hard to quantify at the moment, but we're pretty excited that Ohio is underperforming because of those factors, and we'll revert back to what I think you would have expected in the first place as those rules are changed.
Frank Perullo: And we're also going to see a full quarter. We have not seen a full quarter. We also had a store that opened late or about a month after adult use launched. So we're hoping that we see a modest ramp from the benefit of a full quarter.
Operator: The next question comes from Andrew Semple from Ventum Financial.
Andrew Semple: Just want to go back to one of the new strategic pillars. There's a comment on minimum margin targets. I'm just wondering how the retail outlet model and those outlet stores, whether that fits into the new strategy. Could you maybe comment on plans for those stores and whether you'll continue to expect to develop the outlet model.
Samuel Brill: Sure. And look, just to be clear, the outlet model only makes sense in certain markets. So we enter those markets very carefully and make sure that the key factors that we look at are there before opening an outlet store. But we still believe that it fits within our strategy because, again, while they're lower margin than traditional retail, we're able to capture more vertical margin from our wholesale production. And that's the key thing. We are going to get a significantly higher margin from selling those products directly to the consumer. In fact, we kind of look at it as a direct-to-consumer opportunity for our wholesale channel. So the margin difference between selling it to a non-Ascend door versus selling it vertically in the wholesale -- in the outlet stores is significantly higher. So we think it fits actually very well with our strategy in those markets where we have the strong wholesale position.
Andrew Semple: Great. Very glad to hear those outlet stores will be staying. My follow-up would just be on -- maybe if you could update us on CapEx plans for 2025 as we're kind of getting closer to next year. What's -- what are the kind of major projects you're envisioning for next year? Or are there any major projects on the capital budget side?
Frank Perullo: Thank you, Andrew, for the follow-up. I -- next year looks a little bit like this year, where a majority of our CapEx dollars will go towards new retail builds. We currently have 6 builds in the pipeline in that number I expect to grow. And we'll continue with some modest improvements to our cultivation, whether it's automation or incrementally adding some square footage where we can. So can't give you exact guidance right now, but looks -- it's going to look a little bit like this year with retail being heavily weighted with the spend.
Operator: There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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