Q4 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
[music].
Operating earnings conference call at this time, all participants are in listen only mode. A question answer session will follow the conclusion of formal remarks. During the question answer session. We ask participants to limit to one question and one follow up question. As a reminder, a live audio webcast of the call is available on the Investor Relations section agreed terms website.
And will be archived for replay.
I'd like to remind everyone that today's call is being recorded.
Let's turn call over to Jennifer Bewley, Chief Strategy Officer. Please go ahead.
Thanks, Mike.
Good afternoon, and welcome to bring some sports quarter 2018 earnings call.
I'm here today, with founder and CEO Banco blurred in Chief Financial Officer, He had to me George on it.
Today's discussion in responses to questions May include forward looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements.
These statements are based upon managements current expectations and speak only as of the date of this report.
The company cautions readers and listeners that there may be events and the feature that the company not able to accurately predict well control any information contained in the forward looking statements is inherently uncertain is subject to a number of risks that could cause actual results to differ materially from those can team in or implied by the forward looking statement.
The company cannot guarantee any future results levels of activity performance or achievements.
More information on these risks and uncertainties is providing the company's reports filed with the United States Cure, Even exchange Commission and Canadian Securities regulators, including the annual report on form 10-K, which will be filed on or before Monday March Thirtyth 2020.
Egypt worked along with today's earnings press release can be found under the Investor section of website <unk>.
I used to no obligation to update or revise any forward looking statements to reflect events or circumstances, but near right. After the date of this call.
Throughout the discussion Gee, I always search and non-GAAP financial measures, including EBITDA and adjusted operating EBITDA.
Reconciliation of non-GAAP financials.
Need to measure to the most directly comparable GAAP measures is included in our earnings press release, and FTC and SEDAR filings. Please note all financial information is provided in U.S dollars unless otherwise indicated.
Thanks, everyone and now you're saying.
Good afternoon, and thank you for joining us our fourth quarter earnings conference call.
We're covering our quarterly and full year 2019 results I want to take a moment to address what degree some team is doing across the country as it relates to the Corona virus outbreak.
Our first priority has been and we'll continue to be the health and safety of our team our customers and our supply chain.
Our response to unique daily to closely monitor this evolving and unprecedented situation.
We understand the severity of this many three deals and remain focused on guiding our team and business through it as regulations change in some cases day to day.
To date older stores and facilities have remained open as local governments has does have designated canvas cultivation in retail central businesses.
As such we continue to just a new regulations and new ways of operating to ensure continued access to Kansas products that our customers have come to rely on in some cases for serious medical conditions.
You're doing so we are following CDC guidelines for increased sanitation restricted not a central visitation and travel and controlled entry and access throughout our facilities could support Cie social distances.
Additionally, we are working with our regulatory partners to expand services, such as delivery and curbside pickup to ensure a customer sets continue to see access products that provide relief.
Especially in these uncertain times.
[noise], despite the macro environment, we remain bullish on the medium and long term prospects of the sector and our business.
Our prudent capital allocation philosophy serves us well, especially in time such as these.
Do you take care of our team so they can take care of our customers.
Our success squarely rests on the dedication of our fantastic team to deliver the results that we will share today.
With that said I'm pleased to report that 2090 twos demonstrated our consistent execution against our clear strategy to distribute brands at scale.
We delivered $216 million in total revenue.
Beating our internal expectations and for those the remember exceeding our initial IPO roadshow estimates.
We hit our new store opening guidance by opening 20 new stores.
More than doubling our retail sleep across the country.
We closed our strategic acquisitions on time and triple the size of our team.
And most importantly, we.
We guided the business steward inflection in the back half of 29 team as we converted to positive adjusted operating EBITDA.
We're now moving towards positive free cash flow in 2020, all while maintaining a strong balance sheet.
This sets us up well for the future as we build on our solid foundation for sustainable growth.
I am pleased to share as an in February GTR registration with the FCC as a domestic issuer became effective as a result, our financial reporting including our year end financials now complies with U.S. generally accepted accounting principles or gap.
Anthony will provide more color on this later, but we view our transition out of foreign issuer status immune to it you see compliance as an important step in providing investors with increased transparency and comfort.
Now for results fourth quarter revenue was 76 million, an increase of 11% quarter over quarter, while full year revenue increased 246% from the prior year to $216 billion.
This marks our fourth consecutive year of tripling our annual revenue.
Gross margins fueled largely by the expanded production and distribution of our brand portfolio, new store openings and increased foot traffic to our retail stores, especially in Illinois, Pennsylvania, Massachusetts in Florida.
Our brands are now distribute didnt eight markets steadily expanding our strategy to distribute brands at scale.
Finally, new Jersey retail open during the quarter and we are proud to now be generating revenues and all 12 of our markets.
From the start we have rejected the concept of growth for God's sake. Instead, we are highly focused on driving profitability and I'm pleased to report that we're making considerable progress on the bottom line.
Adjusted operating EBITDA for the quarter was over $14 million or about 19% of revenue.
We are beginning to see scaling our business reflected in the continuous improvement in operating margins.
Looking back on 29 team, we had growth across our entire business as we continue to execute our inter open scale strategy.
We entered three new markets, California, Colorado, and Connecticut with the closing of several acquisitions.
In addition, we want to cultivation and process in license in Ohio, and three retail licenses in California.
We opened 20 stores nationwide and ended the year was 39 locations delivering on our target guidance of 35 to 40 stores by year end.
We scaled our business in many ways, we expanded our brand for production and distribution capabilities in the data by adding to cultivation facilities three operating retail stores in Las Vegas, and one additional retail licenses.
Put significant capital to work through expand capacity and improved production standardization and automation across key markets on the brand side.
Broadens our portfolio too much loved vivo brand, which marks our entry into the luxury CBD and beauty market and incredible one of the most established and trusted chocolate in Delhi edible brands.
In summary, we had a very busy year, leading the solid performance.
Fourth quarter was especially active across our business segments and really sets us up for 2020.
On the consumer products side, we are executing our strategy to distribute brands at scale, the depth and breadth of our brand distribution will continue to expand into the year.
Definitely made during the fourth quarter of 2019 in new markets like New Jersey, and Ohio are expected to begin operating later in 2020.
This will expand the production and distribution of our flagship rhythm brand in the eight markets and bring total GTR brand portfolio distribution to 10 states across the country.
We continue to put money to work towards the core production packaging brand assets to ensure our brands have a competitive advantage into the future.
We've had our first harvest in Maryland in December which allowed us to launch with them flower there the first quarter this year.
And with the financing for my IP, our major Capex projects to drive production scale in Illinois in Pennsylvania began to bear fruit in fourth quarter. Those will continue to be a major focus ahead.
Our retail business delivered strong results for the quarter.
Same store sales again exceeded 50% for the quarter off a comp base 14 stores open for at least 12 months.
Sequential quarter over quarter sales grew approximately 15% on a base of 19 stores.
While we were intensely focused in the fourth quarter to position our retail business to win on day, one of the don't use in Illinois. We were also very active opening locations across the country I'm very proud of our retail team that had an amazing accomplishment at the end of the fourth quarter.
We opened six stores in five weeks across five states, including Pennsylvania, Florida, New Jersey, Connecticut, and Ohio. This is an example of real execution and we have an 18 getting it done.
During 2019, we open 20 stores ending the year was 39 retail locations across the nation right on target.
You don't use program in Illinois, the kicked off January 1st has been nothing short of action packed.
As a first company to open a medical dispensary in Illinois five years ago. This was obviously something we were very focused on.
And overall, it's been success.
The state has seen over $75 million in sales in the first few months.
Viable credible robust multibillion dollar industry is unfolding right in front of our eyes.
As we speak year to date demand is still outpacing supply.
It was all hands on deck for all operators, including the team at Green Dot.
Heading into January 1st reinforce our supply chain streamlined logistics across our operations as we work to meet demand.
We successfully has four opens doors for adult new sales on day, one and today, we have six.
All of this has allowed us to maintain consisting of continuous service for our customers and I'm. So proud of this team.
The range of consumers walk into our stores every day different ages different socioeconomic background and everything in between continues to give me great conviction that Kansas is being widely accepted as a legitimate means to improve the wellbeing of Americans.
We believe the strong roll out of adult sales in our home state demonstrated a tremendous opportunity ahead as recreational programs emerge throughout the country.
Steve such as Pennsylvania, New Jersey, New York, Connecticut, Ohio, and Maryland can look to Illinois as a model for recreational programs.
These states have the opportunity for fulfilling a genuine needed their citizens for job creation and for tax revenue.
And precedes the maybe looking for economic stimulus they might consider canvas more seriously this year.
Thanks to our strategic plan strategic plan, we have strong foothold in these markets and are well positioned to capture the opportunities ahead.
For all these reasons anymore, we remain bullish on the industry and on our business.
I want to point out that our lead program in Illinois can be an model for social equity in other states today, we have talked a little over 200, social equity applicant since the program launched in August 2019.
Licenses are scheduled to be awarded in May and at that point, our program will pivot to become a business incubator that will help license winters set up a success. It will respond to share lessons learned and best practices with a new generation of business entrepreneurs in this incredible industry.
Looking ahead to 2020.
Disciplined capital allocation and profitable growth will continue to guide our operating playbook in new year through these unprecedented times, we're adjusting to its been more rapidly changing environment.
Cruises it is not unlike how we always operated constantly iterating and improving to best serve our customers.
Lately this has been bringing curbside pickup towards stores in Illinois, and Lucky expanded delivery infrastructure in Nevada.
The state's move to delivery only during this time.
In fact on Tuesday, This week, Massachusetts eliminated adult use and is now limited sales to medical only at least through April 7th.
We remain very close to all these situations and adjust as necessary while at the same time looking ahead.
We expect to make further progress on the scale chapter of our strategy to reinforce our operating foundations in our existing markets, both consumer products and retail.
Given the environment, we're cautiously optimistic but know that the future still has great uncertainty in light of the environment. At this time, we will not be providing full year 2024, new store opening guidance. However.
We have some visibility into Q1, I could say that we expect to see between 20 and 25% topline growth in the first quarter.
Our mission to promote wellbeing through the power of candidates and our strategy to distribute brands at scale are deeply aligned.
We will keep building on the foundation laid in 2019 to continue to win in 2020, however that looks at the world continues to evolve.
With that I'll turn the call over to Anthony to review, our financial results for the fourth quarter and the year.
Thanks, Ben and Hello, everyone I Echo Ben's comments on the pandemic because the more proud of our dedicated team and how to handle themselves in the current environment.
Robin do how these past few weeks and our team construction on.
Before touching our financials, let's talk about our transition to step.
This past summer we learned the majority of our voting securities held by Us residents.
A result, we no longer qualified for foreign private issuer status, requiring us to register with the essence too as you asking us to be sure.
I'm happy to report the just last month.
Registration as a domestic ensure became effective.
Starting with Q4 and full year 2019 architectures now confirmed to us GAAP standards.
Well learning I for us, we just want to exercise.
Given the change the gap as it sets up well for our business and our shareholders.
As part of the transition certain adjustments were made rolled through our Q4 in 2019 financials, some of which I will touch on later.
Q4 revenue approximately 76 million, representing an 11% increase over Q2 it.
For the year, we generated 260 million revenue more than triple our 2018 total at 63 million.
Three actually more topline growth means to keep things interesting here great them.
Well, our M&A activity supplement some of our growth the majority of it is driven the old fashioned way.
We made more and so more.
Our year end, we successfully generated revenue from all 12 more markets.
Our net retail wholesale revenue split during the quarter ended at 69 by 31, respectively.
This is up from 64 by 36 in Q3 in this primarily impacted by short term capacity constraints of wholesale.
Strong retail revenue growth at the same store sales new store openings.
When we calculate this ratio net intercompany revenue against our consumer products business, which other since its trim size.
In Q4 intercompany revenue approximately 19% of total revenue.
Our consumer products revenue grew 10% over Q3, largely driven by strong performance in Illinois, Pennsylvania.
Corruption for wholesale Capex projects in Illinois, Massachusetts, Pennsylvania, New Jersey, and Ohio progressed nicely.
As of today phase one of our Illinois expansion in our Massachusetts, and our Massachusetts expansion are now completed.
No I think to Jersey, Pennsylvania, and Ohio projects remain on track.
On the retail side Q4 revenue increased 20% over Q3, largely driven by same store sales exceeding 50% as well as a six new stores, we opened in Florida, Jersey, Ohio, Pennsylvania and Connecticut.
We ended the year with 39 locations consistent with our stated guidance of having 35 to 40 open stores by yearend.
Gross profit for the quarter was 40.6 million for 54% of revenue.
While direct comparisons the previous periods are difficult to the iflorist adapt transition.
We estimate that our fourth quarter gross margin and refer us would have been a 150 basis points greater.
The biggest impact to gross profit as the inclusion of lease extension cost of goods sold.
We continue to be encouraged by the progress we've made on this line item about PML.
Direct to recognize meaningful operating leverage on the consumer products out of our business as we scale.
As you know expense for the quarter was 45.6 million or 60% of revenue.
There's a lot of noise in this number as DNA and noncash stock based comp approximately 17.7 million with 39% of reported SGN.
Both of these items that significant Q4 true ups associated with a lot for us adapt conversion.
On a normalized basis, if you strip out. These two non cash expenses are CNN grew by approximately 3 million quarter over quarter, but 10%.
As we look ahead to 2020, we believe that we can continue experienced significant operating leverage the revenue growing at a faster club and our cash based SGN.
In addition to yesterday the company also incurred 4.19 and total other expenses for the quarter 22.5 million for the year.
As a reminder, these expenses include the mark to market of our strategic investment portfolio as well as interest and other expenses associated with the debt raise concluded last night.
Our investment portfolio, which totaled 24 million at year end continues to provide synergistic value to our core business.
Turning to profitability, our adjusted operating EBITDA for the quarter engineer is 14.4 million in 28.3 million respectively.
Building, a sustainable cash flow positive enterprise was a key gold bars between 19.
The prudent expense management, we exhibited along with the cost cost conscious culture, we built over the last several years has put the company to meet position within the industry.
On the liquidity from.
For the year with approximately 47 million cash 90, or 90 long term debt.
Both during and subsequent to quarter end, we completed three sale leaseback transactions with IP, allowing us to leverage our fixed asset base to double down on key wholesale market expansions in Pennsylvania and Illinois.
As a capital market severely tightened in mid 2019, new visited our capital allocation strategy and developing relationships with Nondilutive capital partners such as IP.
Looking ahead to 20 Twond, we continue to take a closer look at all capital projects, knowing that all schedule projects are fully funded.
Okay, great comfort knowing that our business is on track to self fund its future growth.
In summary, we feel very good about our Q4 and full year results.
We ended the year with a stable building out our infrastructure meeting all markets along or enter open scale operational curve.
We achieved that goal here no operational and have generated revenue and all 12 of our license markets.
In addition, we're well positioned as a number of key state markets that should drive meaningful revenue and cash flow for that business over the coming here.
Looking ahead I anticipate us continued execute against the playbook recognizing that focus drive excellence all the while navigating the unknown environment with a focus on safety compliance and prudent capital behavior.
Now more than ever star the team is the team.
With that I'll turn the call back over to Ben.
Thanks Anthony.
Thank our team for all their hard work for closing out 2019 on strong note and kicking off 2020 with the successful launch of the Illinois don't meet market, new store openings and more sale and leaseback financings.
We are actively executing our strategy remain vigilant on the worldwide pandemic that has profoundly impacted all of US we understand theres a lot of uncertainty ahead, but we believe our continued store accessibility strong business model and balance sheet will be the source of strength upon which our shareholders and customers can rely.
Our ability to show kindness and goodwill to each other and our communities has never been more important.
Here are GTR as a team and as individuals we will uphold our commitment to promote health and wellness in our communities and to support one another.
We believe our products and services are helping people in this difficult situation.
We remain hopeful that recoveries on the horizon and will be stronger on the other side.
And do all the doctors nurses Sciences health organizations, and first responders working diligently to treat patients and find tiers. Thank you.
And finally to our Green dumb team on the front lines. Thank you for all you do.
Stay healthy unsafe, everyone and with that I'll turn the call over to the operator for questions.
To ask a question you want me to press Star one on your telephone to withdraw your question press the pound or hash key.
Please standby what we can pile of acuity roster and as a reminder, we ask participants to limit to one question and one follow up question.
Your first question comes from Robert Fagan from Stifel GMP.
Hey, guys. Thanks, taking my questions and congrats on a great quarter here.
Thanks, Robert Yes, so I would want to see if you guys comment a bit on the recent trends of the Illinois Rec market.
Are we seeing any acceleration or deceleration in March.
Versus the trend for the first two bonds.
And in terms of the supply situation.
That is constrained currently how long do that.
Correct that the last.
Sure. So was it always launch in January and strong January where the market really went up 2.5 times from a $25 million December to roughly $65 million January February.
I think we've seen stronger demand in March I think you'll see continued growth.
Let loose diamonds to grow what's happened a little bit in January there's been a lot of fear is that a lot of uncertainty.
You know.
Other stores going to be open or not so we've seen the surge.
We see strong demand.
To the second part of your question on when will supply to meet demand.
We go back at the same Mackie said before we think the market in medical and tight inventory market was a $25 million market on a monthly basis of total retail sales, we think that goes up at least 10 times.
To be a $2 billion to $3 billion market, just from Illinois, and Thats before out of state between seems a significant percentage.
So we see that ramping like I said two assets not 10. So we got to see that continue to March 19 supply will come online lumpy forms, but slow and steady throughout.
And I think that will start to show up as menus get increased steps in more product offerings.
The things like that.
Your next question comes from Eric Dory from Craig Hallum Capital.
All right Great average said my question guys.
My congrats.
Great quarter.
I was wondering if I could.
Touch on your wholesale strategy, especially and robust markets like Illinois, Pennsylvania.
Can you talk some about.
Additive dynamics you're seeing.
Seats on media articles out discussing the increasing use of swap fees in the industry.
It's actually shelf swap.
Our peers.
Can you talk about what's you guys you're seeing out there.
That might be evolving.
Sure happy too.
You know in supply considered markets, we're seeing a lot of hand to mouth.
We're products, especially on the flower side.
Given the yields and things be tied on the shelves.
We're not seeing arrangements among multistate operators.
To your question, there and frankly, we have not seen a lot of irrational pricing, where you know what type demand pricing could skyrocket, we've seen pricing from this and the margins.
Summer, taking price, but we see stability on price we managed students.
Okay, Great and then just one follow up for me I know you guys.
I don't like to guide and I respect. The fact that you guys are.
The retail store count guidance this year, but I just wanted to touch on free cash flow in one of your prepared comments Ben.
You know obviously with your relationship with IP that significantly helps to lower Capex on your end.
If you guys feel comfortable stadium, when you might get the free cash flow positive and if that could possibly be in 2020 and that's it for me. Thanks guys.
Sure it doesn't happen here.
Obviously, we've got a great relationship with IP.
They effectively helped us finance all wholesale projects that we currently undergoing during 2020.
As it relates to.
The cash flow positive nature of the business.
What we've seen a lot of momentum on this starting in the middle of last year.
Carried that momentum into 2020, so I think if we look ahead.
We anticipate the business to continue to perform extremely well.
And obviously one of the things that we're doing Larson is making sure that were closely watching all opex to ensure that we did.
Hi, good operating leverage stood at the business isn't it.
Isn't any spot.
I wanted to watch its ability to generate cash flow.
Obviously.
The events that have taken place or the last few weeks.
Create a lot of unknowns force, that's something we're navigating very closely that.
We had a lot of Seattle Odyssey solve momentum heading ended heading into this year and Thats continued since since June.
Your next question comes from Vivien either from Cowen.
Hi, Thank you.
Congrats again on a good quarter.
Sure.
Question.
Margin it seems like over the course of 2019.
Okay.
You guys are now.
Well.
Oh.
Yes.
The quarter Anthony.
In terms of.
In terms of.
Gross margin.
A follow up to that.
Our.
Should view.
But.
For your gross margin default.
Thanks.
Great question, Dave and yes, we see nice momentum in the and the gross margin. One. So just a reminder, retail gross margin is pretty consistent so one of the business gets strong operating leverage is really on that on the consumer products side of the business.
We have continued to effectively grow into the facilities that we built and now we're currently expanding them. So looking ahead to 2020, assuming nothing changes we anticipate there could be additional upside within within that gross margin line, depending on the wholesale revenue split as well as how quickly meeting where we added.
Consumer products out of our business the traps, yet we won't see nice momentum there.
Our goal is obviously not going back and what that they were below 50 points.
In the density that would.
It's probably if you think it would really have to happen. One you probably have to see a material change our retail gross margins and then on top of that perhaps the some of the large expansions that were board or federal wrapping up the fixed costs pretty dramatically, particularly in Pennsylvania, Illinois.
We have to see Ed.
Well, it's a drop in revenue to not not cover that fixed cost expansion. So as of now we're not seeing if that again the features a bit I know that any on the recent events in simple watching very closely.
Perfect. Thank you.
Thanks, and then Youre. Your next question comes from Pablo Zuanic from Cantor Fitzgerald.
Thank you.
Just.
Remind us about the cadence.
You had expansion.
Sure.
Mccain and.
Thanks.
[laughter].
Sure. This is happening here, so, let's let's talk about the Pennsylvania Award in the middle of.
Well, the doubling effectively of our capacity in that state.
Yes.
For before this kind of Iris.
We're on track to that expansion to be completed.
The early part of Q3 will have to see how how quantitative plays a role in that timing.
As it relates to Illinois.
Already completed phase one of our Illinois expansion.
We have effectively anymore scheduled stages.
That that really kind of start rolling off.
In early Q3, so we expect to to see the increasing capacity.
Andrew Arpino at some point in the third quarter, and then continue to kind of ramp in there the other phases.
Finished.
Thank you and then just a quick follow up I mean, obviously, you're guiding for 20, 25%. Your question goes into first quarter, 11% before.
As you said.
Hey, good market, but any other stage.
Consideration, mostly just about about leaving only.
Sure.
Thanks.
Sure.
We'll now generating revenue and 12 of our markets.
But there are a number of other states underperforming quite nicely. We're obviously very bullish on new Jersey without it we think theres a lot of upside.
And then we have the other markets, including Ohio.
That is.
Maryland, Florida that they continue to see nice growth within those submarkets and so while all in Pennsylvania, where we thought it may be the capital if the capital beds. We continue to see nice nice growth across really all the markets that we operate them.
Thanks.
Your next question comes from Michael Lavery from Piper Sandler.
Thank you good afternoon.
Can you touched on just from your capital allocation priorities and if they changed at all.
Maybe specifically thinking.
But the withdrawing are not having any store guidance makes sense, but is that because you've already changed plans are just recognizing on certainty around that.
And then just as a follow up also on the one Q color can you give a little sense of how that may look between wholesale and retail is it would be reviewed the right to think retail will continue to have to much better momentum.
Yes.
Thanks, Michael This is Ben.
I would say.
To the.
To the second part is to the second part your question on the first quarter, we see momentum on both sides of the business.
As it turns the dialogue the steady progression of increased wholesale comes online.
Okay. Thanks, then on the capital allocation.
Yes, so the capital allocation priorities and how that's going so.
Our capital allocation priorities as we've been pretty clear on the wholesale production side remain Illinois, Pennsylvania heavily financed through the sale leaseback I would say below those top two priorities, New Jersey, and Massachusetts for Us a little bit continues to be opportunities as Anthony mentioned in his prepared remarks.
The wholesale fully funded on the production side. We're capacity you spent a lot of last year building. The foundation will be 41 stores. So this year, even the stores are in the pipeline that are already constructed that are built.
Already funded or we have the rest of the capital on the balance sheet.
Incremental stores from going from operating cash.
So the point a little while the about when does the free cash flow kick in the start to see the inflection points work their way down the income statement from revenue to EBITDA adjusted property EBITDA net income to free cash flow.
And so.
We're in the driver seem to figure out what it would have that we want to spend or not so once we have the plan, obviously pretty firm for near term.
And to adjust for the back half of the year based on what we see.
Clearly everyday some adjustments here. So we're watching this thing day to day seeing what's happening in the markets being very careful but we believe in size in the markets to put a big capex in to the wholesale production.
On that.
That's very helpful. Thank you.
Sure.
Your next question comes from Matt Bottomley from Canaccord Genuity.
Good evening, thanks for taking the questions and I hope everyone doing well first question I have is just.
On how you sort of your outlook, maybe for 2020 with respect to what is a very turbulent macro environment here at by that even the Canada sector and how you sort of look at you know a lot of operators in March of this year are are really showing all time highs on certainly reasonable.
Basis with respect to surge in demand as a lot of these candidates bottomley canaccord remains essential services, but as distribution potentially becomes.
You know more difficult potentially a lot of states are going to go to delivery only I'm just curious what your viewpoint is on where this market might go in the next couple of months here is part of the questions that might be and what some of the contingencies you guys have in order to continue delivery to a lot of your patience.
The medical but.
Sure Matt Thank you.
So we're planning 2020 in a pretty detailed plan coming in so we have the ability to be flexible on some of it but like I said its day to day as everybody adjust to very changing environment for all dealing with something you'd never dealt with before and so we're analyzing we're thinking about how do not make a major mistake, we're thinking survival, we're watching the cash.
Cash.
And we're in this for the long term.
So two recent throttle was that sort of in mind.
I would say we remain on plan, though we have some marginal capex spends that we can adjust like I mentioned some of the hiring plan. Some of the other thing in the business that are within our control to keep things okay.
It's a nice position to be into having business funded and add cash on the balance sheet and never business performing and if things change we can adjust.
I would say for March.
We've seen strength, we've seen adjustments that were obviously add into the fleet of delivery. We're building delivery infrastructure, it's been an eye to priority for a while it elevates the top of the list as we build that out it's been I think 96 hours or something since.
Since it's been off and we have plenty of cars being every day as the team converts.
And we adjust and so we get nimble and we think about which workforces, where and how can we optimize what doesn't change is the consumers need or demand on this product and again, particularly in these times of uncertainty we've seen increased demand. So we see our part in fulfilling that demand I think overtime.
How's it going to look you told me.
So lets or not and whereas the world going and I can tell you on candidates, but it's going to be in demand and there's wallet share share there, but nobody ever has job and nobody ever use their house things are going to change. We don't think it's that went we're optimistic by nature, we're planning to weather the storm.
Not on the other side of it, particularly geography by geography as we adjust.
I appreciate that very helpful. And then maybe my second question is just more on sort of management's philosophy here in these very turbulent times you guys have probably been the best example of a company that's been conservative and prudent capital allocation. So given where valuations are my understanding is in the private sector that come down just as much is this.
And opportunistic time.
A company like GTS or is it just still uncertain right now where the focus is on just sort of buckling up and executing in the state in the state. The market you already are versus looking for where potentially there could be some accretive.
Opportunities, given where things are lying right now.
We're analyzing that every day, we're looking where is the best fusin shareholder capital to generate the best the trends and I can tell you, it's turned especially where our portfolio is where the world is the best use of the incremental dollar for us is within the business.
We are analyzing lots of things very hesitant effectively in the M&A environment to inherit somebody else's problem. We spent many years, putting this business into a position to be free cash flow positive to be in a position play offense and or weather the storm.
And we're seeing that right now so we love allocating capital your business, we're looking at everything that's going out there on out there in the space.
Particularly California interest remains very dynamic all the time.
But you don't have to swing in every pitch and so.
We like our position right now I see the incremental dollars, especially our cash the best use in our business as it creates the future business you know on T plus one at a very low multiples of EBITDA and so all day long loan invest capital like that.
Thanks, guys.
Thank you.
Your next question comes from Aaron Gray from Alliance Global Partners.
Hi, Thanks, congrats on the quarter.
Just one question for me most have been answered just wanted to circle back to the wholesale and retail mix and how you look at that kind of got important impacts the first quarter. So.
So it sounds like you know Dominican their own stores.
Two.
Kind of eat up a lot of the supply that you had been as we move forward Navvis expansion.
In markets like Pennsylvania, and more what point do you start gets you that wholesale shift in mix start to come back up because you also the open.
More stores, both in Pennsylvania, I'm also known as another market. So what point does that answer outpaced retail store openings.
Sit back and wholesale.
Yes. Good question. So we kind of got hit by a perfect storm in the fourth quarter on the spot.
You know our plans for 2020.
As we pencil it out.
We show.
Secondly, the spread that look closer to 60 40 overall retail wholesale.
And Thats, Matt and I think we'll certainly see kind of that shift to start in the first quarter in really all comes down to our wholesale capacity.
Because that's a business that that's a bit stair step in terms of its revenue growth and so with the with the phase one, Illinois expansion that took place.
As well as some of the other.
[noise] wholesale work that we did we should start to see that.
That kind of breakdown that ratio evolve closer to the 60 40 that I just mentioned now the one thing that's unique is that with our stores. We've got to keep the shelves filled so if it third parties out there are fulfilling demand for us we have to supply that demand ourselves and so thats an area, where you know effectively we don't.
Have as much control because we obviously have to keep thoughts on the shelf at our stores and so thats one thing that could that could impact that that ratio on a go forward basis, but with our wholesale capacity expansions that we have in place as well as what we're seeing from our seed we think the wholesale revenue split like I said will normalize question.
With that to the 60 40 that.
That we kind of projected for the year.
Okay, great. Thanks.
Your next question comes from Grand Graham Chrysler from eight capital.
Hi, Good afternoon. Thanks for taking my question I wanted to ask specifically about going Nevada market in the operation late.
Given that the tourist hadn't market and.
Let's move to delivery only and shutdown of a lot of the attractions in events there.
I was wondering what that what the trends look like sort of into the recent weeks here on that market.
As well as.
The expectations.
The historical customer mix was between visitors to the state versus people.
Thank you.
Sure Great question I'll start by entering the end of your question in terms of bar and who's the breakdown.
Tourist doses local our business was heavily heavily focused towards local business and just look at our stores.
Right down into something obviously, we study they dramatically it's not open stores, we have an estate.
I will tell you that nobody really knows what's going to happen within that market over the next four to six weeks as effectively.
How many that that's that's based on tourism as those dollars effectively dry up we'll have to see and watch it closely and right now with meeting dynamic of delivery, where you had.
Certainly not in of course delivering product on the market, it's hard to get more visibility into the size that market and how that's going to shake out.
And our business historically has been overwhelmingly logo and say we're closely monitoring watching us to see how how overall sales will be impacted.
Okay. Thank you that color and then as a follow up question.
Without having the whole financials in front I mean, just wanted to get more of an appreciation for what the actual cash spend on Capex is going to look like I know, there's a lot of uncertainty in the environment, but maybe you could talk about sort of capital plans. You know is that level supposed to get to look pretty sustained relative to outlined in the past couple of quarters or duty.
Sale leaseback transactions really only be it a lot of the cash spend.
In the in the beginning of the Euro does that kick in sort of later.
Sure on the capital today, and obviously the the dollars have you taken down to my team yeah.
Those projects are going on.
Relates to the to the retail spend as well some of the other kind of maintenance capex. It would have within the business. That's something we're closely monitoring Libya, particularly as a reason thats four to six weeks kind of unfold to see some to really counting.
Kind of shape that discussion internally as far as what dollars, we're going to spend one and how.
I will tell you that.
You know heading into this we had this penciled out pretty.
Pretty closely and so as things start to enable corona.
In certain sharpen the pencil, but it's something within this year with the maniacal focus on cash and making sure that we didnt have to tap.
The capital markets too soon to execute our 2020 plan.
So the impact than would have is really on the business and then how much of that all that impact.
It's going to have on the cash flow generation of the business that we plan to use on on Capex. It will be self funded.
It's really more wells, where we would actually see the impact in something is you know again in the coming weeks, we'll have more visibility on.
Understood. Thank you very much will occur.
Your next question comes from Andrew sample from Petulant wealth partners.
Hi, guys congrats on another great quarter.
Thanks, Andrew.
First one for me.
We've heard a lot of commentary in the marketplace about the supply and demand side.
And how those have been impacted by the krona virus.
Just want to pick your brain the regulatory side of equation.
It looks like for.
The balance of 2020.
So are you seeing fee.
Potential impact on secured from regulatory approval open new stores to get products to market.
Any states in particular that you think the timelines have been pushed out.
I am, particularly thinking of Nevada in Massachusetts.
He used to Spencer is but.
Additional color there would be appreciated.
Sure. So this has been.
I think it we step back committed and you look at candidates we quickly gone from new legal two essential.
In time of maximum and maximum uncertainty that weve never seen cans in deemed across the country as an essential service spoke of medical side and mostly on the adult USAT across the country.
So I think the biggest thing on the regulatory side as in the very active conversations, especially as we speak about some of these markets say all the markets Eastern Mississippi that are effectively tightly regulated limited supply the mood operators have active conversations with regulators people worried about safety compliance renewal is trying to take it.
Management system, and really trying to get patients to feel better but do it in respect launched way. So it's been amazing to watch, whether its connecticut, or Ohio, or Illinois, or Maryland, or Florida, as everybody adjusts and issues guidance like we talked about from curbside to delivering things like that.
We see Massachusetts.
Eliminate adult use such primarily these from what we hear from from insight into them outside about preventing Interstate travel. So people coming say from New York, Massachusetts, and we know the out of state bid. There is quite strong. So that's a prudent decision, especially in this environment and as we've seen that a ramp up the delivery business.
We see short term pickup, but again like to one Anthony said the net demand is no different from a consumer, especially with the local demand questions how much money in people's pockets of which wallet share gets cut first.
Remains to be C., we have confidence in Kansas in that wallet share.
I think it remains fluid around the country and what's going on.
But we're very active in these conversations.
And our proud to continue to certain customers.
Great Thanks for that.
Just one follow up here.
No it's extremely early stages.
You are investing a lot in developing that would bring infrastructure and cards curbside pickup.
Abilities have you received any indication from any of the regulators are deal where.
As to whether these practices would be permitted to continue.
Once these stay at home orders ultimately look.
Well, if you really can't is.
It's been hard enough talking about what we want to do now versus what they think they might do ahead.
I think regulators are operating with the safety first I want to make sure we don't make a major error.
So I think common sense and say if the program goes with delivery to go smoothly and there's no major complaints not a lot of noise and no problems it might be inclined to keep it.
That said regulators state regulators municipalities don't often operate with common sense. So we remain vigilant TBD.
Obviously, the world as Justin and so technology is a major partner to the consumer and how they access the product and whether that's delivery curbside drive through you made that we see that continuing to evolve.
Your commentary thank you.
Sure.
Your next question comes from Scott Fortune from Roth Capital Partners.
Thank you for taking uptake here and congrats corridor.
Everything asset a couple of questions first is staff employee situation fishing eight that at all how that coming about.
The Golden State regulators allow you, though I have pretty quickly from that standpoint or is it riskier.
So clearly the health and safety of the team remains the top priority so to stay like Illinois, where their stay at home essential employees, who weve armed our team with whether its badges or tax for cars or copper communication channels for essentially employees to get to work.
And as we rotate staff when that split shifts.
Things like that I would say from priority standpoint with regulators. The first step was essential services.
But there's going to be like you mentioned accelerated badging, often the badging process and tightened as somebody hired in the space takes a painfully long time.
I think people are potentially you some common sense, we see different approaches in different states in order to higher and especially if you think of the pool of talent from industries like hospitality or restaurant food service, there's lots of able bodies.
One of the employed.
Biggest relief, we can bring to our team on the front line is more troops effectively.
So we continue to work that channel.
Continue to remain open subject to the right health and safety guidelines.
I think and the real quick can you provide any color you know there then while demand.
Coming on board.
Regulation any color on products moving in the off flower bait person board edible.
From that standpoint.
I mean, particularly through the I'd say everything is moving.
I think given where the demand has gone it's too hard to see the difference within the basket.
Switching to think of respiratory risk given coated you might say owned it would be less of that.
It's hard to tell given how strong the demand is whereas the big game.
Last year, we Didnt see a share go down in date.
Okay. That's it.
Sure.
Your next question comes from Glenn Mattson from Battenberg entitlement.
Hi, Thanks for taking the question another good good quarter as well.
You know most things that's obviously an enemy do.
Over the head, but just on the Illinois and the as it relates to it as it compares to Massachusetts. So obviously as you mentioned that the Massachusetts ban was partly related to or maybe Hollywood tourism.
Is that kind of something that the how is that being illinois or thinking about can you maybe just kind of help us think about.
The pros or cons, what their wayne as far as whether or not to keep adult rec open or or to shut it down.
Brett really just so we can kind of think about what to look for as these.
Developments on Volte. Thanks.
Sure I didn't have using its common sense of an approach as possible.
There is enough stores opened in the states that are able to serve the market currently and we see that continues and there's not a new York city nearby here, but I think everybody is watching it.
We've seen the medical market go to curb sciences, alleviating some of that crowd.
We've seen hours, you know elderly or what we call young hard special designated times.
Other kinds of accommodations.
Okay, great. That's it for me thanks.
Sure. Your next question comes from Alan Braxton from New candidates venture.
Hey, first of all how refreshing routes is actually a consensus great execution last congratulations.
Got it down.
Yes. My question. So let me at both on the board.
Electric vehicle guys.
Other volume.
Rivals.
I've done a fantastic job.
Accessing that market.
I believe.
As well as well like at near term Capex.
Sale leasebacks, that's all right great fit.
Billing of their capital markets person, who understands.
All you have balance sheets now that.
I'm just wondering how you thought about it.
So your balance sheet over over pro might you Digest.
Pockets capital markets remain challenging or how you all about equity.
So this is Ben Thanks, I would say that.
In general the way, we're thinking about the capital markets as if they closed and went out of business, we'd be fine to continue to operate the business for the foreseeable future.
The business should produce enough cash that we can throttle with that growth capex looks like and we turn off the growth Capex and didn't open more business, we produce free cash.
So you can certainly guild equity with retained earnings overtime.
It's not as fast as on the way. So we're very comfortable with that so so we view ourselves in a strong position, we like where the businesses with enough with really the production capex funded and demand curve that we're willing to kind of double down on.
Short term blip or not.
We believe these markets are going to be multiples decides that they are now as we put these dollars in they're going to generate multiples of themselves.
Shortly and then overtime.
So I think thats, how we look at you want to comment.
Yes.
Hey, I'm only thing I would add is that you're probably looking at kind of the liability side and people functions more effectively however, they are.
We went out to market on that on the debt raise we didn't take down the full amount that we could have because we wanted we wanted to get a better sense of how the business performed well.
So we started with call it a little over 100 million.
During the fourth quarter, where they got you know adjusted operating of plus or minus 14.
Just under 60 million effectively run rate and now we're in March and obviously, we've got two months Neely part of the year that.
We still visibility too and so we're quite comfortable with the with the total debt that we have on our balance sheet more ability to services with all of our covenants among some and I'll just say that we've continued to take a measured approach to the liability side of the balance sheet.
Didnt, taking only when we added to our balance sheet back in 2019, and we don't ticket Whitey, when we're making big capital decisions within the business and so we're okay.
Slowing down the business, if we need to if it's the prudent thing to do for the shareholders. I think we've proven that and I think we'll continue to prove that.
Okay. Great. My follow up question is just regarding.
Still difficult environment forecast.
Both of our retail side.
I will stop this but.
This is going to be a prolonged.
Environment, where will struggle with shutdowns and things like that it's just what oil.
Production side, whether its.
Yes.
Our lessen.
So a lot more capital shortages of people may not be able to keep the doors or just wondering what you think you guys are.
Yes.
Two.
Okay.
Thank you are prepared to ship that went out with.
Yes, where we are we able to meet demand the capex in the production numbers are funded.
We think the market like I said on Illinois, there's more demand and supply out there and if we look at the total capital going into the space.
It's not fully funded.
So it's a very advantageous position to be allocating capital into that space I'm not sure. If you man if the world falls off and there's no demand there or how we plan for an under supplied markets across the country.
We're prepared for both it's.
We find ourselves fortunate in that position we're in heading into this environment.
Sorry, I wasn't clear then I was just asphalt.
Excellent editors they have some supply issues due to capital markets as well as others, perhaps challenges just getting people over the facilities.
Just a.
The worst case scenario type so I just want more of your oil demand.
Well we mentioned.
You might have to supply.
Okay.
If you can you supply of all of that definitely question.
We hope to the business in the industry remains you know where all the participants lean on each other and function cooperatively.
Which is what's happening we're feeling shells and everybody else is certainly shows we hope that everybody doesn't fall down there'll be some but I think there's no supply coming on these markets that if not.
Sole source, so we feel confident and what's going on the supply side will limit some of the growth at the supply side will determine the growth rate in Illinois for this year and for the foreseeable future essentially the same thing in PA same thing in New Jersey.
And we'll watch up.
The only other thing I would add Alan is one of things it gives us great comfort and making some of the big wholesale bets that we have is having the retail in the back end such that.
In the event that.
That will move into we could we get effectively turning the business and so more of our shelf space. It is absolutely necessary.
Got it okay, thanks, asking staples.
Thank you.
Your next question comes from Russell Stanley from Beacon Securities.
Good afternoon, Thanks for taking my question.
Just a a wanted to ask on New Jersey, and how the how your first dispensary is performing.
At this point and what your plans are in terms of timelines for your second and third.
Okay.
Great question Ross, So we're very bullish on the New Jersey market.
We have one store opening Patterson.
Right on the edge of Patterson Bergen County.
It's performing above expectations, you see a lot of demand in that state.
We are working.
Curiously to site secondly, third location now I will tell you that the.
The local jurisdictions have gotten a little bit.
I want to say squarely, but there hasn't been given the referendum that that's taking place in new Jersey at the end of this year.
I think.
They understand it if we knock on the door that.
We have to have you don't use conversation in some of those still to just not going to do that until they actually get a sense for how to local jurisdictions will.
Well shut out in terms of four against the U.S.
I tell you that we're in that we're in the northern region in New Jersey, We think it's the most attractive region for a variety of reasons and there're a lot of great places that we could put stores that we think.
We'll be flagships effectively for the business in terms of timing I think it's preliminary to say obviously cloud is pit is added to speed bump into the equation and.
In any then it's it's a top priority for the business and something we remain very focused on hopefully on our Netsol. We've got more of an update on that will soon.
That's that's great color. Thanks, Anthony just on a Illinois or I guess, a similar question your timelines on your your eight to 10 locations and if I could sneak one in there just on on Naperville, given the results of the referendum when.
When you think you might be able to turn that store over to adult just given the steps that are required.
Thanks, Ross, Yes isn't to just set the stage, we had five medical stores, which we can convert or add adobe use each one of those five as well as open on five other ones.
And so since we don't use has come with the additional licenses from 55 medical is 55 additional billion shows on to open both have been hours on new W. side.
So we only ones that have the sole w. stores open the three more coming.
I think we have good visibility on one of them in a suburb of Chicago called Niles, We expect opened in second and third quarter. This year again, caveated on what's happening with coated and where the world.
And the other one behind that so we can be prudent again, we can control the dial here in terms of capital spend and go fast or not we love our portfolio here was seven open stores.
Got you last point, yes, Naperville, which became kind of the poster child for opt out in Illinois.
Put it on the balance as was the arrangement after they opted out and passed in the past somewhat overwhelmingly.
With strong support and so now that will go to city council for various local jurisdictions and zoning.
All right. There. So we're confident I think 2020 reasonable, but don't like over promise.
I understood that's great color. Thank you.
Sure currency Russ you.
Your next question comes from Robert Fagan from Stifel GMP.
Thanks, guys for taking a follow up how old technology issue when I first on the line but.
I'd like to revisit some of you said about the a the gross margin under a high for us to be what a bit about 150 bips higher.
Relative that translated to a stronger EBITDA as well or the lease treatment.
Switching from cost of goods sold this unique.
And in that said.
Yeah, just wondering if there could have been.
Maybe some depreciation as well that's very did the cost line that would have been.
That excluded from EBITDA otherwise.
Yes, so great question Robert.
You're correct, our gross margin under IRS would've been greater and so what are our EBITDA as well so effectively the biggest difference that means for us is that lease expense now.
One back through the PML. So historically have been then obviously there is there's a change in both GAAP and an IRS.
As it relates to treatment and now going back to gap, we have lease expense running through those cost of goods sold and then also as shown on the so you're absolutely right you would've seen that would drop to the bottom line, we would have had.
Greater EBIT adjusted operating with the deal.
Dan Thank goodness.
Yes.
Okay, good, but obviously a use the new convention going forward, but interesting on the west Thanks, guys.
Sure.
And there are no additional questions at this time I will turn the call back over to the presenters.
Sure Thanks, everybody for dialing in.
We wish everybody health and safety as you stay at home and we get through all this together we will talk to you again in May as we review our first quarter. Thanks, everybody.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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