Q4 2019 Earnings Call
And welcome to the true leaves cannabis Corporation first quarter 2019 results.
Conference call. My name is Marcelo and I will be your conference operator today.
As a reminder, this conference call is being recorded I would now like to introduce your host for today's conference Ms. Lynn Ricci director of Investor Relations for true leave you may begin.
Thanks nurse tell us.
Ladies and gentlemen, and thank you for joining us today to discuss financial you felt corporate highlights the true Leap, Kansas Corporation fourth quarter and year end 2019 with me today are Kim Roberts, Chief Executive Officer, and Mohan Srinivasan, Chief Financial Officer.
Following our prepared remarks, well open the call to questions well, we get started I would like to note that today's call is being recorded for the benefit of investors individual shareholders. The media and other interested parties. Please remember that our discussion today may include forward looking statements that involve a number of risks uncertainties and other.
Factors that could cause actual results to differ materially look forward looking statements.
Material factors and assumptions were considered and applied making forward looking statements. These risks factors are included in our Mdna for the quarter ended December 31st 2019, and then the earnings press release that we furnished in connection with today's call.
Statements made on this call speak only as of today and we assume no obligation to update any of the spawn looking information also our prepared remarks. This morning reference non IRS financial measures in order to provide greater transparency regarding truly.
Any non I have far rest financial measures presented should not be considered an alternative to financial measures required I have already and are unlikely to be comparable to non IRS financial measures abide by other companies.
Any non IRS financial measures reference on this call reconciled to the most directly comparable I FRS measures and compete and DNA for the quarter ended December 31st 20 Nike.
Well listen the table at the end up our earnings press release.
We believe that our profitability and performance his brother demonstrated using non I have for US metrics. Please note that all dollar references Archie U.S. dollars.
This morning, we recorded for the fourth quarter and year end 2019, a copy of our news release financial statements and Mdna, maybe access to the Investor Relations section of our website truly dotcom and we're also filed on SEDAR. In addition, a webcast of today's conference call will be available on our web.
Right now I will turn call over to our CEO Kimberly.
Thanks, Lynn and good morning, everyone. Thank you for joining US we're speaking with you all today in a distributed manner as we all practice social distance thing I want to wish everyone listening on the phone and online well and hope everyone is staying healthy during this time before I cover Yaron results and provide a business update I would like to share with you how.
Truly was dealing with Kobe 19.
We were hurt to have medical marijuana gain essential status as markets. We operate in if you stay at home orders states deemed cannabis essential across our country and this action speaks to shifting perceptions any important acceptance we are gaining in the U.S.
We are in some ways fortunate to be in an industry deemed a central and therefore, not it's directly impacted by the Kobin 19 crisis. However, we are being affected in different ways.
From the way, we go to market to the incredible investment and man hours spent by our teams to address an uncertain and very fluid landscape and although we've seen some short term benefit the enormity of this situation is not lost on us. The cabin 19 crisis is causing a severe impact to other industries, our country or health care system as well the way it's affecting our.
Patient communities employees and their families.
As a company with properties at risk during Hurricane we haven't established preparedness team that we quickly convened for Corona virus planning in early March changes were immediately implemented throughout our facilities and in our truly dispensary to maintain seat halting environments to work and transact business.
Let me outline some of the more significant changes for you.
Our first act where to protect our patients by ensuring our retail dispensary, we're safe clean unhealthy, we contracted with a license remediation contractor to conduct the cleaning events across our facilities and implementing new cleaning procedures. The spend three limits in here spacing in our lobbies to encourage special distancing. In addition, special store hours are set up.
Side for our immune compromised patient to address the special needs about patient segment.
Probably most noticeable at that we took a fresh look at how we could best approach truly Britain or actions. During this time, we launched new offerings and pilot programs, such as mobile hub curbside pickup Stuart's dedicated to pick up only and making better use of technology for scheduling and delivery alert.
Internally, we've been busy as well we moved quickly to protect our employees and facilities updating policies to provide additional resources to our employees and added procedures to keep our workplaces states such as implementing temperature checked for all employees entering or facilities beginning in early March.
Our teams focused on workforce balancing in anticipation of potential employee absences. We've also accelerated our hiring to meet these expected means as well known increases in deliveries and in call Center and online shop volume.
We made immediate changes to our production in sourcing.
We're taking advantage of our oil inventory by increasing production to ensure we had eight weeks of finished goods inventory available for our stores.
We also have good insights and partnerships with suppliers and a source secondary suppliers if needed.
Vertically integrated cannabis company, our supply chain visibility you control provide shelter from supplier risk and finally, we made investments such as increasing or at least fleet by over 80 delivery vehicle to prepare for increased delivery needs in the state.
These actions were completed while our business experienced an increase in demand from patients as cobot 19 started to take hold in the U.S. This behavior, followed similar patterns that we have seen before hurricanes hit.
Analyzing the pre versus post cobot environment, starting we ended March 13th, Florida Weekly average demand increased by approximately 17% in oil and 37% in flower compared to the weekly average leading up to coben truly have outperformed the competition by achieving 21% growth in oil and 62%.
Broken flower during the same period, we were able to meet this heightened demand due to the on hand oil and flower inventory readily available to us via our robust supply chain, there's a yield of approximately 50% oil share and 58% flower share. During this last four week period, our ability to easily ramp up production.
Leverage our purchasing power supply team requirements and our large trained workforce of approximately 3000 employees that can shift as needed set up an advantageous position to quickly address changes in market dynamics.
The changes in our patient interaction and ramifications on how we conduct business will be felt for some time to come.
I'm confident however that the holistic and strategic thinking about our business. During this crisis, along with investments, we're making will help us gain critical analytics to increase efficiencies across our business.
There continues to be uncertainty was coven 19, but we're navigating this turbulent time and leveraging the strong foundation, we've built our organization rising up as a team committed to serving our patients that's been truly inspiring they've done some amazing work preparing and adapting our business for co bed and not ingenuity positions us to emerge from this situation.
Stronger than ever now turning to our results.
Truly have experienced a strong fourth quarter and exceptional year end, both financially as well as operationally our revenues were 79.7 million for the fourth quarter, which represents a sequential quarter over quarter increased 13% and 122% increase over the same quarter last year on a full year basis, we achieved revenues of two one.
<unk> and 52.8 million exceeding our expectations as well as the streets consensus we're happy to end the year on a high note and deliver another record revenue quarter truly is adjusted EBITDA on the fourth quarter was 45 million or 56% compared to 36.9 million or 52% in the third quarter on a full year basis.
EBITDA performance was 132.5 million or a consistent 52% completing a second full year profitability for truly.
Our leading profitability continues to set us apart in the industry and remains an important differentiator for truly.
2019 was an important here for our business results were driven by the introduction of Smokeable flower in Florida last spring.
For those of you feel followed us over the last year, you'll remember, Florida ramped up extremely fast remaining in the 50% range of our product mix for the balance of the year.
Operational efficiencies also contributed to our success. These efficiencies were achieved by implementing automation investing in technology platform and introducing new programs. We also added to our bench strength, both within the executive team and our board of directors, which brought new ideas best practices and procedures into the mix and we continued to build our.
Brand by brand high quality innovative products to arch relievers and delivering authentic customer experiences. This all served to increase customer loyalty and maintain our leadership position.
319 was also shaping up to be a very important New York Rother him and our industry with profitability insight for many of our peers. The U.S. Msos decoupling from the Canadian market and the proposed safe, making act, making progress then the ball brought a shift in capital markets lack of access to capital caused many companies to reevaluate their expansion strategy.
Jeez, we anticipate the truly disciplined approach to our M&A strategy and our patience as we watch the capital markets decline will present us with many attractive expansion opportunities in the coming month.
We began the year in 2020 excited about our future and we still are.
Despite the capital market upside in the back half of 2018 and competitors pulling out of our rich and robust, Florida market to invest in other areas. We were in good financial shape and kept our but on the gas opening seven stores in Q4, ending the year 42 dispensary is here in Florida.
At year end, or Florida employee count stood at 2866 or 18.5% of all Florida cannabis related jobs. According to the Leapley year end report, we're not only the largest cannabis employer in the state and gotten county, Florida as largest employer in general, but with our current head count of over 3000 employees in the U.S. as of the end up.
The one we believe that makes us the largest MSO employer in the country and our team continues to outperform as truly this currently enjoying a solid market share with 19% of the Florida dispensaries generating approximately 50% of the market share. It's a market we understand and has what we believed to be incredible growth ahead for.
As our backyard and we intend to dominate this market in 2020, we will plan to continually Ob open stores and strategic location, where we can either service a high rate of deliveries into the call a patient request and populations or secure solid locations ahead of the expected recreational market in 2022.
Let me give you a quick update on the other states for the truly presence in Massachusetts, we are close to them to completing the phase one cultivation build out and nearing completion of our first dispensary build out in north Hampton. However, we currently have reduced visibility with regard to executing on our plans due to the Kobe 19 crisis, Massachusetts had limited can.
Production activity and has postponed CCC inspections, we will reassess our timeline once inspections resume.
In Connecticut, we just recently rebranded our Bristol dispensary to a truly location, we waited to complete this branding to assure a seamless transition and the patient understood that the customer experience. They relied on was not changing with the acquisition amid a number of new dispensary also opening in the state.
Despite the centuries in Connecticut growing from nine to 14 at yearend, we were happy with our performance and being able to maintain an outsized market share. We believe this is based on the great customer focused team in place we're watching for the recreational market to open up which will be an important catalyst for the state.
And our Palm Springs, California location. We're also in the process of rebranding the store and we'll be moving to a new store footprint within the same plaza the California. It's been Threed has been treated as experimental like an R&D store, where we tested products based on time of year festivals et cetera, we carried into product assortment, reducing the number of products as more of a hybrid model.
All of the West coast out everything under the Sun for yourselves and the East coast more medical field and we had success. The revenue performance has increased which we believe as based on the improved presentation of less skews and our employees knowledge of products.
Let me now talk a little bit more about our retail dispensary performance I believe we are dominating the market in many ways, which can be seen in our retail metrics a year and call. It. The good time to offer a little more detail and these metrics are too good to not to share in order for you to think about our business beyond cannabis and in a pure retail light a walking through our metrics.
For payback per store customer retention same store sales and revenue per square foot.
In Florida, we achieve a payback period for each new store in just under two years. This includes store build out inventory capex for indoor grow to support the store and assumptions for cash margin doing business in Florida is less expensive in part by our scale advantages to the payback period may not be the same as operations and other states.
Im not sure if that is traditionally used in retail to reveal customer loyalty is our customer retention rate and comparing the third quarter with the fourth quarter of 2018, we had a customer retention rate, 72%. We previously tracked customer loyalty using a boomerang report, which required analysis of patients actions through various stages of the lifecycle trucking shopping.
Patterns are combined scoring methodology, but we will start instead reporting on this industry standard customer retention metric going forward.
A second but closely align metric that reveals customer loyalty and plays into the customer lifetime value is growth in average patient spend year over year.
Average active patient spend as tracks on a monthly basis using basket size and visits per month as we look across our patient purchases year over year, we have seen a shift in purchasing pattern trends.
Here in 2018 acid patients visited a truly store on average 1.6 times per month with an average basket size of $145. These trends have shifted to smaller basket sizes, but more frequent visits as of yearend 2019, we had on averaged 2.7 visits per month by active patients with an average basket size of 110.
The $1. So all their basket size of smaller it's a net positive with the overall revenue per patient as of Q4 2018, our average active patient spend per year was approximately $2800 that has grown to approximately $3900 in Q4 2019 or an additional $1100 are so per average active patient.
What makes this such a great number to see is that the growth in patients spend is not due to price increases the customer demand and loyalty as we have not raise prices over the last year.
To track these boils relievers, an individual store level, we use a traditional same store sales metric for the 13 locations that were opened in both 2018 in 2019 for the entire year same store sales increased by 44%.
Ill note for this metric that on her business continues to mature some of these stores will start to reached their peak in number of patients served our expectations are that there will be a growing number of stores in this comparison, which will start to reflect that ceiling offset by growth in average patients then.
And finally, the typical retail metric of revenue per square foot to truck overall performance in 2019, our 44 dispensaries across the U.S. generated approximately $2300 per square, but this is based on days open for our full year revenue and our total retail square footage as of the end of December 2019.
Comparatively this retail metric puts to leave in line with other world class retailers.
We believe in the retail world. These metrics are impressive and our key performance indicators for growing our business successfully and profitably.
Ultimately, what's driving our continued market share as a mix of our core values for safe quality product innovation that resonates with our true leavers and consistent delivery of authentic customer experiences. This approach helps us achieve the high level of customer satisfaction and loyalty that generates the positive word of mouth effect, we're seeing within our true lever community.
Building on these strong retail metrics in our success in Florida, we were pleased to expand the truly brand expansion for us as not only in grab I'll remind you that we make calculated decisions based on our criteria to assure our investments will not only be financially successful, but will promote the truly brand that we have strategically curated and nurtured since.
At the beginning.
While we continually evaluate acquisition opportunities and we have implemented a strategic initiative for applications for licenses in new States. We also focused on organic growth as Mohan will speak about we strategically increase our indoor cultivation facilities in Florida to maintain paced with the demand for Smokeable flower, we convert dry cannabis it has not sold as flower.
And to oil to preserve shelf life, we supplement our oil reserves as harvest from our greenhouses the ability to reap large scheduled harvest from our greenhouses as an important tool for us to manage production costs, while maintaining scalability and our stable oil inventory, we can easily ramp up or down oil production to match customer demand, particularly in one.
Edibles become available for sale in Florida.
Before I turn the call over to Mohan to review the financial results I want to offer the following I am hopeful as you all are that a successful global effort will be made to eradicate eradicate kobin 19.
In the meantime, we have a commitment to our true leavers to provide access to the medicine. They rely on to our employees to provide safe healthy workplaces, where they can earn a living in this new economy and to our shareholders by continuing to execute against our strategy and create value.
Despite the uncertainty across the country, we remain excited about our business strategy the growth of our teams and our new innovative plans and products on the horizon as a roadmap Matt for 20 for truly even 2020, our focus is on these four actions.
One we will continue to invest and grow in Florida, and fully intend to maintain our market dominance.
We will continue to explore and look for smart accretive acquisitions and participate in license application processes that will offer us expansion possibilities, new revenue streams and broadening our truly brand into new markets.
We will continue to invest in our innovative track assuring we address our commitment to provide a wide variety of options and choice for our patients and we will stay focused on building a sustainable business, meaning being financially disciplined to maintain profitability and deliver shareholder value.
Lastly, although we had hoped to be in a position to update guidance on this call the underlying assumptions as I just outlined for all of you have not changed or gained additional clarity and Cabot 19 has added a layer of uncertainty. We do however feel comfortable reiterating the annual guidance range previously provided for 2020 at this time and we'll consider updating as things come into.
Okay.
With that I'll turn the call over to Mohan before I, My closing remarks, and open the call it acuity Mohan.
Thank you Kim and good morning, everybody, let's move to the company's 2019 financial who do you have been dedicated to building a business with the strong financial Foundation.
So well atrophy into 2025th the decremental Vitesse and the uncertainty this as cost across many sectors that out kind of bus companies, particularly those with exposure to good equity issue, we want to market, who lack access to capital markets and been Austria, well in this global economic slowdown.
After most profitable public kind of bus company into you out on with cash on hand, who live is well positioned to continued execution of our growth plan as Kim covered we had a strong through 2019 exceeding our internal forecast as well as the street estimates achieving a record quarterly revenue of 79.
Point $7 million, which as Kim mentioned represents a sequential quarter over quarter increase.
Puts them under 142% increase or the same quarter last year.
Well, yes.
Diluted earnings per share of $1.64 cents.
Before I move on to revenue less production expenses and cost of goods from third party suppliers.
Let me highlight for you and accounting brought the continues to be a challenge put some investors he had into you.
As part of this this is different GAAP methodology.
<unk> expenses grow cause biological assets be capitalized until they have sold us put out accounting policy for the expense growth cost because we expect these costs, we expect fluctuations from quarter to quarter grow costs, particularly do soil nutrients and anything that is used as an input.
Going plan, including labor cost as well as direct and indirect overhead.
So on a consolidated basis production expenses in Florida.
Cost of goods from third party supplies in Connecticut, and California totaled $28.1 billion for the quarter.
Every new loan production expenses, and cog was $51 million $51.5 million for the quarter or 65% of revenue.
This compares to $20.8 million or 58% in Q4 2018.
Full year basis, our revenue less production expenses and cost of goods from third party suppliers was $163 million or 64% compared with $68.6 million of 67% of revenue in 2018.
For comparison on a full year basis.
Flicked optimization of gold costs as we previously discussed under GAAP, we would have been at 76% for both 2019 on 2018.
Cultivation forms part of production costs alone go into conservation.
That has been on will continue to be increases go at cultivation facilities as we continue growth, allowing us to keep pace with market demand.
During the fourth quarter, we reach reportable cultivation of 540 544408 square feet indoor calculation.
1 billion 140000 square feet of greenhouse facility.
Combined our cultivation footprint.
1 million 684400 square feet had capacity of 63190 kilograms annually.
In the first quarter, we completed 72000 square feet in gold cultivation construction in Florida with an additional 24000 square feet of indoor contribution anticipated to be completed in the second quarter.
Since what a discussing cultivation. This may be a good segue to our inventory discussion.
Had a total of $204 billion as inventory, which includes significant amount at fair value.
Based on a quantity basis. This will translate into five weeks of flower inventory and 22 weeks of oil inventory.
No, but inventory levels that influenced by hardwood cycle.
The recent harvest from old greenhouses, given to supply of oil inventory that we can drop drawdown upon on strategically schedule August from these greenhouses.
The future as necessary.
Now turning to it expenses for Skyworks sales and marketing expenses.
These costs are largely dispensary related costs.
Fourth quarter amounted to $18.1 billion or 23% of revenue compared to $14.7 billion or 21% of revenue in the third quarter.
On a full year basis.
Sales and marketing expenses accounted for $53.9 billion, 21%.
The increase in cost in this expense category from Q3 to Q4 was primarily due to payroll costs related to seven additional stores that opened in the fourth quarter plus costs related to preparing for new store openings for the fourth quarter for the first quarter of 2020.
DNA for the quarter was 5.3 billion or 70% of revenue compared to $3.2 billion are 5% over revenue for the prior quarter.
This increase was primarily driven by expenses related to new market opportunities in the fourth quarter.
On a year over year basis, Ginny was $14.1 billion in 2090 versus $19.2 billion in 2018 degrees from Janney expenses from prior year was primarily due to stock compensation expense related to 8.8 million previously disclosed warrants issued in conjunction with our.
Public in 2018 that can be found to be understated. This understatement is currently on the immaterial amount under does and non cash expense that has no impact for 2019 on did not require the company to be fine art recertify, it's probably the financial statements.
Total expenses in 2019, with 30% compared to 44% in 2018 overall.
Being a high degree of financial discipline, but only expenses is wonderful piece to profitability.
On a full year basis operating income for the company was $285.9 billion.
$60.2 million in 2018.
Net income was $178 million what are the year taking into account the net change in the fair value of biological assets required number I caught us accounting standards versus $27.9 billion. In 2018. This was a year over the years increase of 538%.
We believe adjusted EBITDA non I bought us measure boy, it's valuable insight in toward profitability on performance.
Adjusted EBITDA excludes from net income as reported interest taxes depreciation noncash expenses occupancy expenses other income growing costs related to the biological assets and unsold inventory a noncash effects of accounting for biological assets.
Report adjusted EBITDA to help invested assets operating performance.
Yes.
Our adjusted EBITDA in the fourth quarter of 2019 was $45 million or 56% of revenue compared to an adjusted EBITDA of $36.9 billion or 52% of revenue in the previous quarters.
On a sequential quarter to quarter basis, the adjusted EBITDA increased by 22%.
Please note that capitalization of goal costs were biological assets unsold inventory fluctuate as new facilities have brought online as selling and marketing costs varies depending on new dispensing openings and inventory levels and asked me into new states like Massachusetts, where the cost structure can vary.
We believe our normalized adjusted EBITDA, we'd be at all 43%.
On a fully of basis, adjusted EBITDA was $132.5 billion or an increase of 159% over 2018.
Now turning to taxes.
What percentage of gross profit, including the net change in to fair value of biological assets.
Two packs it was 23% for this quarter.
What are the year 2019, it was 26% compared with 27% for fiscal 2018.
That's a reminder, we began explaining taxes in dismantled starting in the second quarter 2019 based on our belief, but this is a better on most able to measure of calculating effective tax rate that as a percentage of income before taxes based on discussions with our tax advisors.
Moving melco at balance sheet.
As of the end of fourth quarter 2019, our cash balance was $92 million or an increase of 61 billion from the end of Q3.
This was primarily the result of competing financing activities. During 2019. These practices. These transactions further strengthened our balance sheet by nearly $68 million. In addition, we met interest payments on all looked at a note obligation.
Finally, as Kim mentioned, we are reaffirming our 2020 guidance range of $380 billion to $400 billion for the year.
Anticipated adjusted EBITDA of approximately $840 million $260 million or 37% to 40%, we will continue to exercise financial discipline, while leveraging our scale.
In closing 2019, what's the successful for us the Delaware topline growth up 146 cents year over year, and we feel very good momentum in our business.
Ill now hand disorder, Kim for closing remarks Kim.
Thanks, Mohan Trillium is gaining recognition for our financial discipline and strategic direction. We fully believe this strategy. We have is the right one for US we demonstrate our core values through the quality products, we bring to market. The initiatives, we put in place for the safety of our employees inpatient and then in the financial discipline, we maintained to deliver share.
Our value medical cannabis is one of the few economic engines and this new economy, and we can be powerful contributors. We will continue to grow our business responsibly sustainably and profitably and I'd be remiss, if I didnt take this opportunity to personally thank our employees from the folks in our cultivation and production facilities that we heavily.
Depend on daily to grow high quality plants and produced industry, leading products for our show to the dispensary and retail employees, who work so closely with archery leavers to deliver the ultimate customer experience NDR brand ambassadors and of course, the executive team and corporate employees feel implemented best practices and brought industry, leading approaches to our busy.
We appreciate how everyone has stepped up as we are all this together growing truly one customer at a time and as I always say onward.
Thank you for joining us today, we look forward to updating you on our progress again next quarter.
At this time I'd like to remind everyone in order to ask a question. Please press star and the number one on your telephone keypad.
Your first question comes from the line of Robert Fagenson from Stifle GMP. Your line is open.
Hi, guys and congrats on a on a fantastic quarter here.
Right.
Hey, Ron.
Okay.
Okay. He has disconnected. Our next question will come from the line of Pablo Zuanic from Cantor Fitzgerald. Your line is open.
Good morning, everyone. Thank you.
Two questions.
I realize that.
You go from guidance for the full year, but can you comment about the first quarter.
Would you characterize it as a quarter to what you saw acceleration when it comes with sequential growth versus a 50% growth you're showing in the fourth quarter.
The second question will should really be about twentytwenty.
The EBITDA margin in place about 58% for the year, Judy 56% into into fourth quarter.
It's assumption doesn't Massachusetts, California, I wanted to go to be a large part of revenue assumptions margins would come down some color there.
Thanks.
Thanks, Pablo asset to answer your first question I would say that and we certainly has seen and this is illustrated in the data that you all that you won't see from the department of House in the I'm you on a week over week basis. So we certainly have seen.
Increased growth.
In Q1, so I can answer that question affirmatively. The second to answer your second question with respect to EBITDA for the year and I think that that as as we repeatedly say that number does tend to to does tend to fluctuate based on a number of factors and with the heavy contribution from.
Florida, and we would hope to be able to keep that EBITDA EBITDA margin up. However, again there are many many factors that contribute to contribute to that EBITDA line.
Okay can answer just a quick follow up regarding the fourth quarter and I know that should be dated November when I look at the all more data for the December quarter Fleetwood for you at 43% volumes there was two abroad.
And then you delivered 15% sequentially.
After 20, but some sequential growth in the fourth quarter I'm, just trying to understand in the fourth quarter do anything decelerate.
Why is it a disconnect abundantly between New York sequential revenue growth on the volume data.
We'll hear more price competition in the market to be changing mix. If you can give some color that fourth quarter.
Thank you.
Yeah, No Pablo Thanks for the question keep in mind and I think we've we've said that's in the in the past Q4 does tend to be a little bit more promotional you have a couple of a couple of activities that happened in Q4 every year. The first is gonna be and not black Friday, and leading up to that.
In November and then of course, the holidays and in December which you know our typical philosophy is that we were not overly overly promotional however, fourth quarter is is I would say out of all of them all the quarter's the most promotional that you'll see from us so.
It was likely it was likely that and then on flour and I'm not sure again kind of everyone's got a little bit of a different way of building up there their own model, but on flower keep in mind that we do have different price points in tears and products that go into that flower number. So while it is the you know on by eight cents 33 43 53.
Dollar shelves. We also have pre roles and then we also have you know our many product, which is I'm surprised a little bit a little bit lower so and you know that category within within the flower category. There is different you know different different products that speaks to different customer customer segments.
Got it thank you.
Yep.
Your next question comes from the line of Matt Mcginley from Needham Your line is open.
Thank you I think my first question is a follow up on that promotion question. The promotional cadence change at all into the first quarter in into into the present environment given that.
Kind of what's going all the world it.
Philosophically should we think about how you approach discounts or loyalty going forward or in the president army compared to what we saw in fourth quarter and last year.
Yes. Thanks, Thanks, Matt It will occur like I said, it will you know change going into Q1.
We always in this is again typical for us and follow the same pattern that we followed last year, so going into Q1, we typically.
Slow down on promotions certainly in January as Weve refocused on wellness and I, just coming off of I'm coming off of your and promotional heavy environment as of December.
So I think that you can expect that moving into Q1 that those that promotional activity. We'll have we'll have slowed and keep in mind. We do have of course for 20, it's going to be a very different for 20 than than any of US I think probably had planned and so there will be in we're still working through got a little bit and as to how bad.
Two I still keep us celebratory and environment around 420, but of course appropriately coupled with our realities and not wanting to encourage large crowds at any of our at any of our location. So we're working through that now and it's a work in progress I will tell you with respect to the philosophic.
Well balancing is something that we debate internally quite a bit in terms of wanting to add a sense of normalcy wanting to be sensitive to folks in this current environment that there are folks fewer you know out of work and maybe a little bit more price conscience at this point, but also making sure that we're still on introducing high quality products that have the a premium.
Value attached to them and and again, having having that balance so I think you'll see a more balanced or normalized approached us in Q1, which is normal on but I do just want to highlight for you that and we do have more 20 coming up in Q2.
Great and purpose is probably for Mohan, but on the inventory how should we think about the composition of your inventory balances now compared to what we saw in the fourth quarter. I think you said you wanted to keep around eight weeks of finished goods inventory in the stores does that I.
I guess infer that your inventory balances will become a source of cash in 2020 or should we expect continued investment there in working capital days to fund the growth of the business.
Thank you for that question so.
If you look or what inventory, Brian, but really I would work in process inventory have gone up on besides that we have probably been go to be done probably 22 weeks. So.
Oil inventory. So we believe this oil inventory in order to address you know what is needed for the marketplace and also will be wanted to convert I would biomass into oil themselves. So we basically believed that as we grow we need the inventory for new stores, which are coming.
Yep.
We will open seven stores in December and we're planning to open a lot more stores in 2020, so the inventory levels will fluctuate depending on the store openings and how much inventory if required I'd also like anything else, we anticipate that it's going to be anything up into supply.
Supply line, so that is how we manage.
Hey, Hey, Matt really quick on that so just as a reminder, and we just trying to touch on this in the script, but I think it's important to really highlighted again here and our green house and our greenhouse cultivation footprint, which is very large we we harvested.
Over the back half of Q the back half of 2019, and just finished up in Q1 and now that we have completed that harvest. We have all of that oil inventory available to us as basically our supply to draw down from throughout the year, which then we'll be able to make a decision.
And as to whether or not to replant, all part none of that footprint, depending on how quickly we're drawing down on those on on that oil inventory and throughout the remainder of the year. So we wanted to you and we did it makes us the strategic decision to plant the full on the full square footage to that.
We could have a baseline to understand what that yield was and how and how we would be able to utilize that yield throughout the course of 2020, and which then again because of the low cost basis for that for that product in that biomass comparative to an indoor footprint and that puts us in a strategic advantage we believe.
Leave to then be able to optimize our indoor footprint for our high quality flower as well as our high quality concentrate product. So we can at most plant not act that that greenhouse footprint twice a year. So I'm you know we finished the one the one planting from last year, and then again, we'll be making.
Decision.
To replant and as we move into the fall of the fall this year.
And I mean, very clear right now certainly in Ur cobot scenario, we're very very thankful to have that available for us.
Right. Okay. Thank you very much very helpful. Yep. Thanks, Matt.
Your next question comes from the line of Robert Shaygan from Stifle GMP. Your line is open.
Very sorry about that guys technical difficulties and I apologize.
If I have no.
Overlap the question here with.
Somebody else in the line.
Maybe I'll go with one thats a little more obscure.
Can you give us an idea about.
What the backlog of registered versus qualified patients is now a steep stop games that data, but I think it's a good growth indicators. There is there any update on that.
Okay.
Yeah, Rob I don't have any data on not at all since the state stopped reporting on it and I can give you what we see in the marketplace, which is just that we do believe that the processing times have increased.
Inefficiently from where we were you know quality year, or so ago, and and we do know that folks are continuing to get to get their card and in addition, I think it should also be noted that the state did did app half an emergency order whereby folks who are renewing cards can do Soviet Tele medicine.
So there are many of the larger doctor practices in the state that are taking advantage of that and had been very efficient in getting and in getting.
Folks renewed via that telemedicine and.
Available option.
Okay, great sounds good.
And.
Forgive me again, if someone's assets already but obviously you guys aren't going to update the guidance now but.
Given where you've exited the year here on the highest margins or would be but to date.
How do you how do you reconcile that with your garden, calling for you know, 38% kind about the midpoint.
I mean is a isn't reasonable to expect there could be some upside to your to your profitability margin in the guidance.
Yes, Thanks, Rob and and we answer that a little I think while you were on where you are maybe dialing back end, but happy to repeat for you and we you know again and we certainly as you know we update guidance when we have I changes to underlying assumptions that I can be validated through some sort of some sort.
Of data on if you'll recall last year with Smokeable flower right. There was a lot of asks for us to update guidance prior to that actually being implemented which we declined and but we did of course update guidance. After we had a couple of months worth of data.
And could provide some and certainty or more certainty around around that guidance and so similarly, and we would have loved to have been in a position to update guidance today, and we hope to be able to do that on as we move through through the cobot environment.
But we're not in that position today, but we do feel strongly that we can reaffirm with respect to the EBITDA margin question specifically.
Yes, we have of course and you had.
Great and the 50% EBITDA margins in 2018, I think Tim to Mohan point that he.
Definitely says repeatedly is that EBITDA margins of course can fluctuate based on a lot of doctors and and you know at this point, we're going to we're going to reaffirm on but we're always hopeful that we can that we can be as beat guidance.
Okay great.
Just a quick when I'm, assuming with your you know very advanced delivery platform and experience in that area that good even.
Likely help you either keep your market share gain share given the co bid the situation what's your thoughts there.
Well as me every reporting and in our and certainly I know most of you on the phone out follow us on the on I mean data pretty pretty carefully and and as we reported in the pre versus Kobe and environment. We certainly are seeing and our ability to increase increase market share at least in the short.
Term and I think that it's a question as to what the broader market does.
But you know we've added approximately 70 vehicles, we can add additional vehicles as and as needed and so we certainly are leveraging our existing infrastructure and our existing logistics team to amplify that segment of the business as market demand dictates.
Well congrats on a quarter again, thanks again.
All right. Thanks.
Your next question comes from the line of Andrew samples.
Actual on your line is open.
Hi, everyone congrats on a great quarter.
Thanks, Andrew.
Just wanted to us.
Florida is one of the wider states towards implemented to stay at home order or just on April 1st.
I'm just wondering if you've seen any noticeable tapering of demand.
Since that order went into effect.
Yeah, No I appreciate that so just to kind of update so Florida the governor prior to April 1st with allowing and mayors and local county governments to to govern their particular areas individually and so there wasn't bit of a path.
It's work however, there there were existing I stay at home orders for the majority I would say of South Florida, a prior to that April 1st and actually the April 1st incorporated the Miami Dade order into that into that state wide order. So on that has been.
Obviously, there's a large population down in a down in south, Florida, and we have seen at there's been some up and down.
Frankly, and with respect to demand again and I think this is all publicly available information on that Ilim IMMU and web site. So we saw kind of pre hurricane spike than we saw and sort of Oh, a little bit level, a lower week I should mention that when I say lower I do not mean lower as in.
Back to 2018, I mean, lower as an right before which was trending up on as it as it was kind of I'll call. It our normalized growth rate prior to and you know any sort of a stocking up activity.
So we saw go back to sort of normalized growth then to stay at home order, we saw kind of another spike and then we're sort of you know at normalized growth. So it's been it's been I guess spike so long as growth curve is how I can it's how I can best characterize it but again.
You know all that data being available on the on the on them you website, but so far we have not seen any and you know any sort of rapid decline.
In the market.
I appreciate your comments there that's very helpful for my thinking on it.
Okay, what would your outlook be on opening new dispense reason in this environment and receiving the regulatory approvals to do so.
So the great news as is that we have been in touch with our regulators as you can imagine they have been extremely helpful. On all aspects of our business through.
Since since the Cobot Ur Cobot crisis began to take hold and we have been and talk with talks with them about inspections and as of right. Now they are willing to continue to move forward with inspections. So I'm. We are looking to looking to add to continue its basically no change.
From our previous plans with respect to.
Store openings. So I think you'll you'll you can expect on some store opening announcements from us.
During any barring any changes there.
Will likely be opening and a little differently and for some of you who may have seen our store openings in the past there typically very large celebratory event. So we're going to have to approach that again, a bit differently with respect to how we how we handle on patient pick up orders and launched the delivery platform and do some things a little different.
But.
We do need there's additional stores to be able to handle the demand that we're seeing so we're going to continue down that path.
Great just a final one for me on the patient trends.
I'll turn it over.
Well very much appreciate those metrics a very impressive overall just wanted to ask what were your thoughts on the large increase in the number of patients.
Or the number of visits per patient.
Per month or do you have any insights as to why.
Jump.
Sure so sharply.
Yeah, I think that and so I think there's and there's a couple of things one I think that that's in line with a market shifting from an oil to having flower in the mix. So I think that the product mix and in of itself lends itself to more frequent visits with smaller basket.
Sizes per visit so I think that and if I had a point to any one driver there I would say that the onboarding of of Smokeable flower last year with probably the primary driver for that shift and we find that folks who are making those purchases of flower are primarily flower buyers.
Do tend to come back more frequently as we have.
New streams that are coming because obviously those are tied directly to to harvest than what we have available. We've added a to our portfolio screens. We were also adding to the rotation of strains that we have available for patients so more frequent and more frequent new streams as well as greater.
Video streams across all the various formats and price categories. I'm. In addition, and we also of course of continue to innovate on the other product front and we've added a number of new products to our shelves and it's one of our goal quite frankly as a company to maintain that pace of innovation and so those new products.
Also drive and drive customer customer behavior and to to come back to our to our stores and pick up this new products. So I would say those would be the too.
Sensual potential drivers there.
Thank you very much.
You're welcome thank you.
Your next question comes from the line of Jason Dan Bergstrom Pi financial your line is open.
Hi, there and again congrats on the strong.
Quarter.
Hi, lumber my questions have been answered maybe get some more detail on.
On your delivery fleet, you mentioned that Youve increased your fleet by 70 vehicles.
What is the total.
Total fleet size and if you if you can share.
The the percentage of sales or.
Sort of whether you've seen a significant increase for an after this cobot outbreak.
Sure.
So we have increased our fleet were at the.
Right now we sit at just under 200 vehicle across across Florida, and our delivery orders have increased by 485%.
So it's.
Just a little bit.
Okay.
And then as well.
You'd mentioned some stats some great stats on terms of number of visits and basket size.
That was for the fourth quarter any insights into again. This you know after this call but.
Break comes of what basket size has increased to even if it's just sort of in the ground terms.
Yeah.
We trust that metric pretty pretty carefully and so I for for a for we'll call. It over the last 30 days I can tell you that our visits are and have decreased slightly which I think can be can be expected. So, but just literally like half of half a point so down for.
I'd like to point.
Seven to 2.65.
And then our basket sizes have increased though again I think to be expected and so from a $121 to $127 on average and then again not to 30 day, that's a 30 day number.
Okay, great. Thanks very much.
Yep.
Your next question comes from the line of Russell Stanley from Beacon Securities. Your line is open.
Good morning, and congratulations on the quarter.
Thank you Oreo.
Thank you just maybe a question around price and just wondering if you can comment on on any pricing trends, you're seeing from from peers and how people how people are responding to.
Covert 19, especially given to take product supply for number of products.
Okay.
Yeah.
Thanks for us, we really have not seen any major price adjustments from from our peer group and.
You know really really at all I can say that pricing has been has been relatively has been as remained relatively stable.
And you know we are and again I think you know the market itself of course has gone through on a market increase and in a couple of weeks. There were a couple of weeks that had more significant increases.
Over the last 30 days and I do you know that there appears to be some other folks who are.
Our maybe having having a bit of a harder time, maintaining and keeping keeping up with demand and so and you know I again, I think that that led to celebrate tend to know price decreases when you're trying to ensure that that shelves that shelves are adequately stocked.
Again, I think that that just highlights. The fact that are on our oil available oil reserves, coupled with the investment that we've made in our Smokeable flower indoor cultivation are really coming to fruition and giving us the ability to and introduced relieved to some patients that aren't finding ways.
And what they would they would prefer to use on other shelves. So and it's been an interesting time for us to to Ah to recruit new nutri leavers to our stores.
Great. Thanks for that that color and just my last question is around.
Dispensary additions and understand your comments with respect to reiterating guidance for now, but with the with the recent expiry of the of the cap on on dispensers.
What are your latest thoughts around how many you might add in 2020 and.
Any any commentary around how many locations you have locked down at this point.
Yes.
Yes, and so we were very excited of course to add to see the expiration of the of the dispensary cap and something that I think that we had expected and were but we're glad to see that.
That finalized and we have a number of locations and both under construction and in La and are working their way through various processes and so we expect to a exit 2020 and our goal would be 68.
Dispensaries and.
Hi, I of course.
I love to see 70 for nice round number but on my team is telling me [laughter], giving me out they could kick me now virtually they would.
So.
I would say that we're targeting that 68 number.
Excellent that's great color Congrats again, thank you.
Thanks, Frank ish.
[laughter] again, if you'd like to ask a question. Please press star and the number one under telephone keypad. Your next question comes from the line of Derrick Daily from Canaccord. Your line is open.
Yes, hi, Thanks, and I'd also like to Echo.
Congratulations on a really strong quarter wanted to follow up just on a couple of questions that have been so can you mentioned.
Your commentary just on some of your newer products can you talk about how these newer products with Baird concerns you action things like many in power and Blue River and then maybe even at a high level just.
Some of the ideas or product forms that you may have coming down the pipe for new products for 2020.
Sure absolutely and so we recently launched a number of products as a as I mentioned and one of the products that were really excited to bring to market for a number of reasons is true powder and stay true powder is a NATO encapsulated and Cabot oil products that water soluble so.
It basically dissolves in any liquid and that onset time of it is it's similar to a vape and not it's got a more rapid onset. However of course, it's in just it's ingested orally and say that product has been very well received and we're actually working on additional formulations to potentially add.
Im right now its flavorless, and so to potentially add some and some flavor options to that product and in addition that technology, which we worked on by the way for about 18 months that technology will allow us to formulate a number of other products using that technology as a base ingredient. So it really is potentially a guy.
Changer for us as we think about our edible suite of products that we were hoping to launch in a in 2020 I'm. Once we get additional color on from the department on Edibles rules and into again being able to offer that rabbit more rapid onset and an oral format. We think is is.
Important I'm not price been very well received.
And other products that I'll just highlight quickly is on the Blue River.
THC a product and so this is a and solvent list product as a reminder, aldi river products are solvent less meaning that area. It's a non chemical based process and so eases heat and pressure on primarily to add on to separate the cannot benoit and to create concentrate and seven THC Asap is a.
Hey, I'm inhalation product and it's a it's a very summit, it's basically a pure tsetse product and that you can onto a concentrate pan am. It's also a powders they're not to be confused we're very careful with via the true Potter I just I just mentioned, but again that product Blue River really has a very loyal fan.
Based on very loyal customer base is very and cult like in terms of its following instead that that product as expected has done really well we've got additional blue River products in the works that we'll be announcing with them also here shortly and as we've been doing well as well.
And just on that your commentary there on own edible.
Has there been any any regulatory movement on b bench approval of edible state.
You know Derek we were so close and then Cove Ed.
So I. Unfortunately, the department of health or Fortunately is is very focused obviously on addressing all things related to co bid on including by the way in our facilities when we've needed approvals to changing processes and procedures.
Adding employees rapidly, adding delivery cards rapidly they've been they've been great and working with us, but that also say that on any new rules and regulations and have been haven't put aside and we do know that they hadn't moved forward with passing both packaging and testing our rules.
You know at yearend early early 2019, which were precursors to and we're required to be to be passed before edibles came online. So I've been told that there's a rule that's been drafted and I haven't seen it and that gives me hope that again, assuming we can quickly get through the current and by.
Summit that you know at some point in in 2020, we'll we'll have we'll have rules that we can that we can act on.
Yeah, that's certainly sounds encouraging.
Just a couple more quick ones if I can have you.
I guess the periods at March 30 days when will we really started.
Worry more about coal good have you seen any sort of notable changes in either product mix. We're on the transaction level are you noticing you typically see with delivery a higher basket size over the last couple of weeks with those transactions.
Yeah, so with respect to the product mix and what I can say is that which has been on trend for us so it's a little bit.
It's a little bit difficult to have visibility as to whether or not this would have been.
With or without Covanta, we basically just seen an amplification of what what previously existed. So I wouldn't say that there were and have been any major shifts necessarily we've seen flower continue to increase and which again is reflected in those and those weekly numbers and yes and at the end here on basket.
Size and you know traditionally right, we see delivery basket sizes are higher than a store.
In store basket size and that typically as around I think thats normal for most for most retailers and so so yes and again as just to reiterate what we had said previously across all across you know a total total metric is that our basket over the last 30 days side.
Has increased from 121 to 127 and to your point certainly deliveries increases in deliveries is assisting in driving that and that metric.
Okay, and then last one just on on capital allocation here I. Appreciate your your your update here in terms of them you started yet.
In 2020, so what we think about sort of Capex, maybe more on this means more for you can you give us an update on sort of what your capex expectations are for 2020, and then secondarily that back to you Kim I suppose.
It's just on M&A I mean, obviously you guys are going very very fortuitous situation here that will be balance sheet industry, leading profitability and free cash flow generation.
So can you talk about what criteria or what.
What would be attractive for you in terms of M&A from potential states that you're looking at.
Sure. Thanks for your questions though.
Jim do you want to go ahead.
No I don't know US Okay. It's looking behind go ahead.
Okay. So.
Average capex spend is roughly about $5 million per month. So we basically have taken into account all the different cities, which we're going to be opened in 2020 in that calculation. We are also.
We have a sale leaseback transaction political legal which will basically be bursa approximately $38 million to left on that line. So that will basically take that about so we believe that that we're you know our plan.
We have a strong deposition and also you know we have enough gas to manage the business. So we have Oh, we have continued to spend on the worked out bucks.
That would be.
So from my part.
Yes, no thinks Mohan I'm with respect to with respect to M&A Derrick our criteria that we that we've outlined a number of times remain the same and not and you know M&A of course first for things to be into to be accretive.
And I think I'll reiterate that it's not just about land grab and it's not just about being in a state for the sake of being in a state we look individually at the opportunity and we run it through a number of a number if not a number of metrics, including a discounted we do a discounted cash flow analysis, we do.
You, a and as a synergies analysis, we're looking and we rebuild tear apart and rebuild models and because quite frankly and as many of you can appreciate valuations.
Last year for the majority of the year I simply just did not and did not pass through that model. When we when we ran those those opportunities through although we did look at a number of opportunities. We are finding that you know in existing environment.
That we believe that valuations will come more in line number one number two it's also about the quality of the opportunity from a brand perspective and from a people perspective. So we do understand and certainly appreciate bandwidth constraints and when it make sure that as we think about new opportunities that were also.
You know very focused on the strength of strength of the team on the integration of of that team and with our existing business and the ability to really and make make it make a transaction that equates to one plus one equaling three four or five.
And that's that's something that's that's very important to us.
Terrific appreciate the color. Thank you very much.
[laughter] thinks here.
There are no further questions at this time I'll turn the call back over to lend Richie for closing remarks.
Thank you for joining us today, we look forward to updating you on our progress again next quarter have a great gave one.
This concludes today's conference call you may now disconnect.
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