Q1 2020 Earnings Call

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And welcome to the true leave Canada Cannabis Corporation first quarter Twentytwenty Financial results Conference call. My name is Joanne and I'll be your conference operator today.

As a reminder, this conference call is being recorded I would like to now introduce your host for today's conference Ms. Lynn Ricci Director Investor Relations for to leave you made a weekend.

Thanks, Julie and good morning, ladies and gentlemen, and thank you for joining us today on the call with me today or can reverse chief Executive officer in buying less interim Chief Financial Officer. Following our prepared remarks, we will open the call to questions.

Before we get started I would like to note that today's call is being recorded for the benefit of investors individual shareholders comedian other interested parties. Please remember that our discussions today may include forward looking statements involve a number of risks uncertainties and other factors that could cause actual results could differ materially from those.

Forward looking statements statements made on this call speak only as of today, we assume no obligation to update any of this forward looking information.

Also our prepared remarks. This morning reference non I have already financial measures in order to provide greater transparency regarding truly.

Any non I have for us financial measure presented should not be considered an alternative to financial measures required by I have for us and are unlikely to be comparable to non <unk> financial measures provided by other companies.

Any non <unk> for us financial measures referenced on this call reconciled to the most directly comparable I have a rest measures in the company's Mdna quarter ended March 31st 2020, as well as in the table at the end of our earnings press release.

We believe that our profitability in performance a further demonstrated using these non I have for rest metrics.

Please note that all dollar references are in U.S. dollar.

This morning, we reported results the first quarter 2020, 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 website now I will turn.

Call over to our CEO Kimberly.

Thanks, Lynn and good morning, everyone. Thank you for joining us and I have every one is staying healthy and well I'd like to briefly cover our Q1 results and then opera business update Ryan blocked or interim CFO will give a financial overview of our Q1 results and then I'll offer some closing thoughts and open the call. It a question.

For Q1, 2020, we surpassed consensus for revenues and profitability, achieving 96.1 million in revenue, representing a sequential quarter over quarter increase of 21%.

Our adjusted EBITDA was 49.4 million or 51%, we generated positive free cash flow ending with cash and cash equivalents of approximately $101 million, continuing our industry, leading profitability and maintaining a strong balance sheet are key components of our financial strategy. This allows us optimal financial flexibility.

To capitalize on both organic and expansion opportunities.

Well, we provide a business update I want to share our gratitude for all of those on the front lines, especially our healthcare workers and all those providing essential services. Since we last spoke in April we continue to focus on ensuring safe access for archery, LIBOR and providing a healthy work environment for our employees.

I'm going to special store hours or immune compromised patients launch new offerings and pilot program started curbside pickup dedicated certain locations to pick up only and leverage technology for scheduling and delivery. We've also recently introduced electronic payment capabilities across all participants reason for deliveries.

Before the crisis situations, such as Cabot 19, having the strength of an uninterrupted supply chain ducks in a market and the scale to effectively adapt and respond is vital our ability to quickly pivot during cobot. It's been important because we didn't just haven't extreme shift in how customers interacted and shopped with us.

But but a heightened demand for product as well.

I think the post cobot environment, beginning the week ending March 13th Florida demand over the last eight weeks has increased by approximately 32% in oil and 39% in flower compared to the weekly average for the eight weeks leading up to cobot.

Really outperformed the competition by achieving 39% growth in oil and 59% growth and flower during the same period the ability to respond to the business disruption Itworks relievers need for access is what helped drive our market share increased from 50% to where we are today at approximately 54% prior.

Cobot, approximately 80% of our business with from walk in with the remainder of our transactions to be a delivery and pick up orders.

And what four weeks after March 13th I safety restrictions were impose in response to Kobe, we completely flipped how we fulfilled patient transactions walk introduced to the 20% range deliveries increased to approximately 20% and pick up where approximately 60% over all this shift makes sense given to stay at home and so.

Distancing orders also note that we experienced call volume increases at our call center hitting a high of approximately 55001 of the April covered weeks compared to 25000 calls on average at Florida starts to reopen this month patient walk ins have also started to return over the last few weeks walk in business had been.

Got to swing back to approximately 35% deliveries settled back to just under 10% and pick up the remained near Kobin <unk> levels and the 55% range. It is unclear at this point, how far back that pendulum swing, but what it's clear that truly versus accepted new ways to get the medication they need and we've implemented price.

This is inefficiencies to improve these experiences.

It's difficult to say that there's a silver lining with cobot, but if there is it would be the experiences we've gained by modifying processes implementing new technologies and stretching ourselves we found ways to be more efficient and deliver a better customer experiences and this we believe that not only helped us gain market share. During this crisis, but we'll also continue to increase our.

Capabilities and drive customer loyalty.

We're already seeing as efficiency strengthen our business.

Last month was the poor 20 industry holiday with our preparedness in place for finished good optimize delivery route improved online ordering and shifts to pick up we were not only able to achieve to record revenue days. During the 420 week at approximately $2 million per day on April 17th and again on for 20 it.

Well, we're also able to keep pace with heightened demand during the 420 weekend, we accomplished record numbers such as our highest number of deliveries with just under 1400 deliveries completed in one day, our highest number of pick up with approximately 8500 orders in one day and our highest number of transactions with.

Approximately 15000 orders placed importantly, we were able to handle the additional pressure of these record milestones within days of each other in short we have improved preparedness and are better equipped for growth ahead.

The first quarter performance I, just described both on an execution as well as on a revenue basis is what that's true leave apart the first quarter revenue growth and the cash generated on our balance sheet provides it provides us with the strength to continue investing growing and exploring expansion possibilities that few in this industry have the ability to actively pursue.

Since we're talking about customer behavior and revenue performance, we should touch on retail metrics. Our current store count in Florida, It's 47, making us the clear leader in the state part of our operating strategy is to go deep in the markets, where <unk>, where we want to operate having a sizable present in any one market allows us to effectively benefit from economy.

The scale, helping us achieve our industry leading profitability.

Gail and brand building and an evolving market has also giving us a playbook that we can apply to other markets on our last call. We introduced metrics to help investors compare what we are building and the cannabis industry with traditional retail metrics. Let me update you on our Q1 royalty metrics and some trends we are experiencing in the second quarter.

One metric that it's definitely has there been retail to reveal customer loyalty as customer retention rate and comparing the first quarter 2020 with the fourth quarter of 2019, we had a customer retention rate of 74%. This is two points higher than our Q4 Reid.

Well he metric we track its average occupation spend which we monitor be a number of visits and basket size as we look across our customer purchases, we see a shift in purchasing pattern trends at the end of March we had on averaged 2.7 visits per month by active patients with an average basket size of $125 when.

Comparing the trend at the end of April for the previous six week period, that's held flat at 2.7, how her basket size improved $227.

A third metric tied to retail same store sales. This metric helps track grows at a store level for the 22 stores opened in Q1 2020. There were also opening for the full quarter. In Q1 2019, we had same store sales increase of 27% building responsive and authentic relationships with our true leavers, including active.

Actively listening and building feedback loop, it's important to achieving customer loyalty and this translates into loyalty relievers. That's why we're also excited about new partnerships and innovation, we've been very active so far in 2020 announcing new and expanded partner brands in April we announced a local partnership with the Bellamy brothers for their own.

It'd be stash product line, we rolled out to new products from Blue River, and released new strains and empower collaboration with another local partner brand Sunshine cannabis, we've launched several new products from our R&D team since the start of the new year as well such as true powder troops in her drop true wax and ground flour and of course, we're also prompt primed and.

Ready for edible I still believe 2020 will be the year of articles and I'll keep saying it would animals are approved our R&D team has truly and partner branded edible ready to go.

Along with the new additions just outlined for you we continue to broaden it and expand archery flower strains as well the number of different streams, we grow in order to keep an interesting variety available for our patients has been another important differentiator for us the cultivation team with firing on all cylinders with new strain offerings from our indoor grow during the first quarter, let me now spend.

A moment updating you on our greenhouse harvest and the resulting oil inventory maintaining a certain amount of oil inventory has always been a part of true leaves business continuity strategy. We have a focused on sound business frameworks and foundational practices and we maintain response plan for business disruptions, such as co bid and catalyst such as edible.

As such where the inventory we have we were ready to meet heightened market demand and are also prepared to supply the edible production perks relievers across the entire state of Florida. When we get the word. This also means we can plan to stay ahead of demand by turning the dial up or down as needed when we decide to play our next greenhouse crop.

Based on large harvests last fall, we did not need to plan a spring crop and have not made a decision for planting this upcoming fall the inventory levels will continue to draw down over the next few quarters until we reach steady state by year end, Brian will elaborate more on this point in his prepared remarks.

As I just described we continued to be excited about fourth growth, but we're also excited to have 2020 behavior of expansion for us.

We have previously disclosed that our internal goal is 68 stores in the U.S. by yearend.

Soon we'll be opening store number 50, and Daytona our Daytona start we'll have one of the largest footprints in the truly family of stores at 6000 square feet with 14, Pos systems in a 1500 square foot showroom truly as wells are truly birth are very excited about the daytona location, turning to Massachusetts covenants.

Later construction in Massachusetts, However, Governor Baker announced the phase three opening in the state this week and our crews are back on the job. Additionally in April our adult East application was deemed complete so we should have a clear indication of next steps soon we remain excited about our expansion into the robust, Massachusetts market.

Let me now update you on the other states is a truly president.

In California, we believe we will be in construction made it through the fall and should have our remodeled store completed for Q4, we continue to be focused on creating the products. We're offering to drive increased customer visits and improved sales results in Connecticut. As a reminder, we're one of 17 dispensary than the state during cabin the statins a lotta next.

Engine for patients with expiring certifications through June 1st as we reported last month, our store in Bristol has been completely rebranded as a truly location and be back is that our patients are excited about the rebranding and the new true lever programs that have been rolled out into this market lastly on the applications, Brian we're starting to see some movement and the stay.

That's where we have decided to pursue licensure and we are hopeful as we begin to see businesses and regulatory bodies me forward again, I'll now turn it over to Ryan for financial result, and will return with the closing statement. Thank you Kim and good morning, everybody I'm happy to be here today as interim CFO, let's move to the company's first quarter financial results.

It's kimco look we had a very strong quarter and start to 20 twond.

Truly had record quarterly revenue of 96.1 billion, which as Ken mentioned represents a sequential quarter over quarter increase of 21% at 116% increase or the same quarter last year, we achieved ALLEVYN EPS of 12.

Before I move on to revenue was production expenses and cost of goods from third party suppliers I'd like to pick a moment to touch on our cost of goods sold line item and how it is comprised.

Our cost of goods sold line is not traditional costs of goods sold as you would find would doubt it contains more than that it has a cost of goods sold plus other production cost hence the financial state save in line item description production costs or pre harvest costs are expenses incurred and included in this line item.

Part of this is a production costs related to unfold inventory.

Additional cost added here and what differs from the line under GAAP for those of you are attempting to reconcile or the production costs related to the unsold inventory or said another way, what we call grow cost for unsold inventory.

On a consolidated basis production expenses in Florida and cost of goods from third party suppliers in Connecticut in California totaled 28.9 million for the first quarter.

Revenue less these production expenses and cost was 67.1 million for the quarter or 70% of revenue. This compares to 51.5 million or 65% in Q4 19.

If we would account for growth for capitalization or grow costs. As we previously discussed Thunder gap GAAP adjusted margin would have been at 77% for the quarter.

As we have implemented various process improvements, we would continue to see improved margins in Florida in future quarters.

Part of production costs is cultivation, we continue to build indoor called cultivation facilities as warranted by demand in the state of Florida at the end of the fourth quarter, we had reportable cultivation of approximately 544000 square feet of indoor cultivation, and about 1.1 million square feet of greenhouse facilities combined or cultivation footprint of approximately one.

7 million and have capacity of just over 63000 kilograms annually and the first quarter, we completed 72000 square feet of indoor cultivation construction in Florida with an additional 24000 square feet of indoor cultivation completed in April bringing us to a total of approximately 1.8 million square feet in capacity to produce of nearly 69000 kilogram.

It's a material annually.

Since we were discussing cultivation. This maybe a good segue to our inventory discussion that Ken mentioned earlier in Q1, we had a total of 228 million as inventory, which includes significant amount of fair value on a quantity basis. This translates into approximately five weeks the flower inventory and 24 weeks of oil inventory, including work in process.

Inventory levels a question that we have been receiving regularly.

We believe bypassing the capacity of or greenhouses in 2019, we have gained greater insight into future planning needs, we're able to reduce costs of the oil we extracted and are well prepared in Florida for business disruptions like Tobin and for business accelerators like animals. We do however understand that investors are looking to inventory on a strictly financial basis, and we want to add some.

Color on drawn down these inventories.

In Q1, you'll see the sort of reduction in biologicals of approximately 25 million offset partially from indoor flower trim that gets converted to high end concentrates we would like to target about three months or a quarter's worth of oil for ward off risk and prepare for catalyst. We expect we will hit that steady state amount as we enter 2021.

Ill now turn to expenses.

First quarter Escreen expenses were 28.3 million or 29% of revenue compared to 23 point fourmillion or 29% of revenue in the fourth quarter of 2019.

Operating expense line, it's predominantly dispenser related costs and in the first quarter was flat as a percentage of revenue compared to the fourth quarter.

Overall, keeping a high degree of financial discipline around expenses is one of our keys to profitability.

Operating income for the company was 31.1 million this quarter compared to 82.5 million last quarter. Net income was 14 million for the first quarter taken into account the net change in the fair value biological assets required under purchase accounting standards versus 45.5 million last quarter I'll point out the net income swing you see here is primarily driven from the signal.

Okay fair value reduction in biologicals offset by our business expansion.

We believe adjusted EBITDA, a non however, as a measure of provide valuable insight into our profitability in performance.

Adjusted EBITDA excludes from that income as reported interest tax depreciation noncash expenses Archeo expenses share based compensation other income growing costs related to biological assets and unsold inventory and the noncash effect of accounting for biological assets.

We reported adjusted EBITDA help investors assess the operating performance of our business.

Adjusted EBITDA, excluding that impact the biological assets for the first quarter 2020 was 49.4 million or 51% of revenue.

Please note the capitalization of grow cost for biological assets and unsold inventory fluctuate as new facilities are brought online selling and marketing cost varies depending on new dispensary openings and inventory levels and as we enter new states like Massachusetts, where the cost structure Canberra. This primarily as a reduction of 5% an adjusted EBITDA and we can expect fluctuate.

Since between quarters, we continue to believe or normalized adjusted EBITDA will be around 43% now turning the taxes as a percentage of gross profit including than that change at fair value biological assets, our effective tax rate with 24% for this quarter.

I'd now for our balance sheet as of the ended the first quarter 2020 based on our continued profitability our cash balance with 100.8 million an increase of 9 million from the end of 2019, we are and expect to be free cash flow positive for the full year. Finally, I'll briefly cover our guidance last month, despite the uncertainties related to covert 19.

We reaffirmed their 2020 guidance of revenues in the range of 380 to 400 million for the year with anticipated adjusted EBITDA of approximately 140 to 160 million, we plan to have growth capex investments to expand our store footprint and cultivation over the long term by approximately 5 million per month in 2020.

We feel feel very good about momentum in our business. Thank you for this opportunity to speak with you today I'll now hand, the call back over to Kim for closing remarks, Kim Thanks, Ryan Ryan it's been the rock on our finance team and its efforts have a shirt a smooth transition to our new CFO outlets, Demicco, who who will be joining us in June before we end the call.

Today, I would like to touch on how we're thinking about guidance and our current outlook. We had a very strong Q1 and a healthy start to Q2, however, with the unknown surrounding Kobe and the uncertainty in the macro environment, we're not in a position to update guidance. At this time should that you change we will be sure to update our guidance accordingly.

Our team's ability to quickly plan and adapt has led to new insights into our business our absolute scale along with supply chain efficiencies are meeting the increased product demand, we continue to experience and while there is uncertainty around two bed. We continue to remain laser focused on our growth strategy being able to pivot and appliance.

Earnings will assure that we remain one of the top MSS and the U.S., Florida is a very robust market that we believe as one of the best in the country and where we fully intend to maintain our lead we've shown that's with our continued customer loyalty our current market share and the demand driving our planned store expansion. During 2020, we will stay financial.

Really focused as we execute on our strategies healthy balance sheet and strong cash position don't happen overnight. It takes a lot of forward thinking hard work and listening to your customers.

Financial management decisions, we've made to date have turned truly the into a consistently profitable company that delivers free cash flow and shareholder value. We will continue to deliver in 2020 and beyond.

And lastly, before we wrap up the call. This morning, I want to take a moment to thank our employees. They have been amazing through co bed displaying not only their passion for helping patients every day by providing critical access to medical marijuana, but also truly understanding the importance and being in a central business. They really stepped up to the play.

And we wouldn't be able to do this without them showing up every day and for that we're truly think ball.

Thank you so much for joining us today and as I always say onward, operator, we can open up for questions.

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As a reminder to ask a question you'll need to press star one on your telephone to withdraw your question press the pound or hash key please standby, we compared to Q and a roster.

Your first question comes from the line of Robert Fagan from Stifel. Your line is now open.

Thanks, Kevin and everyone for taking the questions and congrats on a on yet another strong quarter.

I guess I had a question here about a kind of a the state level.

Patient growth and we see that.

Still growing well, but a little bit slower I think Q2 than we've seen in Q1 in Q4.

Last year and it's not just the result of coal with restraining sympathy should movements or is not indicated but maybe just a slower trended inpatient growth then.

In light of that you know the market volumes continued to outpace patient growth, so or or patients going to continue to spend bore as they have recently after co. Ruth just get your thoughts on that would be great.

I think throm, so I would say a couple of things number one.

The decline or you know.

Relative debt inpatient growth was to be expected I'm, particularly in Florida, because I I would say the physician offices basically closed I drink overhead as a result of the stay at home order issued by the Governor and so what we saw a is that there was an order that allowed for existing patients actually received there.

Certification via telemedicine, and so doctors were able to continue their practices by focusing on the telemedicine aspect of research however, new patients and have to physically go into a physician's office and many of those offices were closed through co bid. So as we've seen in recent weeks on this number is beginning to come back just simply we.

Think correlate to the fact that those offices are now starting to reopen across the deep with of course localities still having some different says from market to market with respect to the pace of those reopening. So I think the Dod is the explanation that we have for the trend line, which of course, we're watching very carefully on patient growth, but we continue to gain confidence.

That's going to rebound I mean should rebound through the rest of the border.

With respect to the patient span I would say that you know at TBD right and we certainly saw as I mentioned in our in our prepared remarks on that the number of visit a has not decreased but that basket size has increased and again, we think that that's links to just higher consumption patterns with folks.

Particularly during this time, so I think some of that all relate to the macro environment and in terms of whether or not we see folks actually returning to offices or whether the work remotely model stays in place and how that and how that balances out but also of course the metric that we keep a close eye on.

Great. Thank you Jim that does great detail.

And something else I wanted to ask is about kind of market share driver the lease the way. The we look at it it seems that dried flowered growth did volume has outpaced that of extracted the steep level kind of sit cobot hit and EBIT your data as well so.

Is it fair to say that flower is a bigger driver of market share versus the XTRAC product store and that's you know explaining some of your days recently or is that.

What you see on your side.

Yeah. Thanks, Rob I mean, I think that I am I don't know that I would I would say that it's you know the only driver of market share for sure I think that having depth and across all products has certainly been a key for our our continued success with respect to market share and being able to launch products in segments that we.

We see and are strategically available.

The increase market share has been and you know I would just credit our operations team for their continued analysis around and you know which segments of the market, our and our available right to add to further penetrate and so I don't think get them. You know, we don't look at it necessarily as well it's important to look at macro in terms of.

Flower versus oil it really comes down to the specific product product mixes and those market segments and we released products for example on the flower side and both the premium categories as well as in the value categories and and those two with those coordinated releases and have continued to drive market.

Here in the overall flower category that you all see on a weekly basis, though.

Okay. That's helpful. Thank you last quick one if I could.

I mean, you guys mentioned this before normalized EBITDA margin as the a 44, 43% area.

You know, we haven't see that low level of margin and over a year.

So just wondering if you know why you guys speak to that kind of margins we normalized.

Especially with the.

Banality kind of impact from the outdoor grow like.

It's not a bit low.

On the margin side, 43% normalized level.

Yeah, Rob I would say that if you look across most industries I think that I don't know that 43% and certainly within our own sector could be considered low I'm, assuming you're talking about it relative to our specific company performance, which I again I continue to just be really proud of our team for you know continued.

And to push the envelope in all areas in particular really EBITDA, which we've been focused on I think that we recognize rate that we have operational efficiencies and given our footprint and our footprint in Florida, but we definitely well continue to see and some fluctuations there as we've mentioned in Florida, depending on what we have a happening on.

The growth side and inventories and so forth as we as we've discussed but then of course as we look to expand into other markets.

We think that there will there will be on different margin profile potentially a particularly linked to regulatory restrictions and different ways that we may have to operate in those markets and so I think that that's what we mean, when we say normalize great and certainly taking into account for the fact that we will see.

Escalation and even in Florida on from quarter to quarter.

Okay fair enough. Thank you very quarter. Thanks appreciate that.

Your next question comes from the line of Derrick lay from Canaccord. Your line is now open.

Yes, hi, Thanks, just echoing Bill's comments congrats on another exceptionally strong quarter here just wanted to follow up.

On that market share discussions are clearly products.

New product introductions and your loyalty programs are helping drive market share, but can you talk about the dynamic that you're seeing in terms of are you seeing new customers.

For the coming into the space and she was truly first or are you gaining share from some of your peers, how does that sort of dynamic playing out.

Yeah I know thank you guys. Appreciate the question and so it's a mix right. It's always been a mix for us, but certainly you know as as we just alluded to in during this during this covin time, where certainly continuing to guide I would say more than our fair share of initial patient visits I'm, which is an important part of our strategy, but also.

And again the operations team has spent a lot of time really analyzing market segmentation and and making sure that we have depth and available products, where we've seen opportunity for us to gain market share from competitors and so you know examples of that are both in the value segment and as well as in the premium product segment. So when you.

Look at our product releases that add that we spoke about on the on the call in the first quarter I feel in the value segment. For example, we launched Pheno ground and then we increased our offerings in minis and there's of course are on the value segment of flour and in addition, no. We launched on true WACC for example, true powder.

Our in addition to our premium partnership with the Bellamy brothers and the flower categories. So you know launching in both of those product segments, where we felt that there was room for growth and depending on the competitive competitor that we were we were looking at and on a week over week basis, and so it's again, it's being strategic in terms of.

Our product offerings, and and having product availability in product depth products that speak to new patients, but also I'm looking across the landscape and positioning and b to B our peer group.

Okay, Yes, that's helpful.

When you that the breakdown that you gave in terms of.

Customer consumption patterns, whether it be delivery curbside or walking.

Are you seeing any sort of differences there in terms of basket size like it does I would assume maybe delivery might have wire basket size, maybe not in this environment no fee like how does that sort of look.

Yeah, No great question, and so yes, I would say delivery does have and I think you're right on rate delivery does have a bit of a higher basket size on average and you know what I would just remind folks that perhaps is that we did begin offering free delivery for customers over the age of 65.

I am during co bed and however, we do charge a delivery fee given the regulatory again restrictions in Florida, we have to have two people in a vehicle and we do offer next day delivery across the state and so we do charge a fee for delivery. So it makes sense to me intuitively right that that delivery basket would be a higher Uh huh.

Her basket rate, you're going to order may be less frequently but have a higher basket and which is again kind of interesting. When we think about the fact that even given that and not typical assumption our rate right. Our frequency rate still has maintained at approximately 2.7 visits on average per month, and so it's been sort of an interesting.

Dynamic and through Cove, Ed, but yes to your point, we see a bit of a higher basket on on delivery.

Less so you know on on per on walk ins I would say would be the bill the lowest with respect to typical basket size.

Okay.

That's helpful. And then just last one for me just in terms of your your inventory position really appreciate all the color.

You guys gave there in your prepared remarks.

But you mentioned that you'd like to bring called that concentrated old inventory down from sort of 24 weeks.

After that.

What about flowers that five weeks of inventory sort of that the target number that you'd like to outperform.

Yes, that's that's right I mean and flower again, that's more of a just in time product right. We want it we want to make sure that is properly carried but then it's getting into the hands of our customers and you know it's again, it's we think of it more than you know kind of a fresh produce equivalent type product and so we.

Don't want to have you know more than I would say that five to eight.

Number on hand on flower I'd, just because you know there I think is the is the level of quality and standards that we have in terms of getting that product to our customers.

Okay, great. Thank you very much.

Alright, Thanks Derek.

Your next question comes in line of Matt Mcginley from Needham. Your line is now open.

Thank you.

On the DNA sequentially, there wasn't much change in that way than the dollars gravy at about pace in the business, but did you have any.

Spike in extensively ended the quarter.

I guess, how did that trend for the organization has reacted to co that and how should we think about that into the second quarter.

And then I guess Moreover on on the guidance side is a 49 million in adjusted EBITDA in the first quarter comparable to the full year guidance 140 460.

[laughter] I think for that thanks for the question, Matt as so so let's talk about the expenses Bert we started to see a little bit of expense.

And the in the back half are back really I guess third.

Of Q1 related to co bed and you'll certainly see some of that continue to carry through on onto the key Q2. However, I would say that generally speaking we haven't really we haven't seen not as a material amount and and and certainly has been and primarily linked to pursue.

In L. increases around you know again not delivery shaft and said the demand of course, you know more than offsetting I would say the increase the increased expense. There I said, but you will see that continue to continue to flow through a bit into into Q2, and you know related to again kind of going back to the guidance question.

Don't have Kobe in the back half of the year and if so what.

Regulatory responses will be will be to that and you know.

Whether we like it or not we are we are a product of regulatory bodies and we're a product of those responses and so you know any event. There is around two in the event that there is a I'll call. It more severe response than there was initially that could materially affect our business and we're just not prepared without having any visibility there to make any money.

Cereal adjustments.

Guidance, we're going to continue to watch it obviously, we'll we'll again have the same conversation around the table strategically as we as we look to next quarter and if we're in a position then to update we will but thats really the thought process around where we are with guidance as we sit today.

And then as far as a neat things in Florida, I mean, given the unit economics is phenomenal in your market share strong one a push harder on those mitigate yet unit openings I mean, I understand the project development can take some time, but.

The extension the exploration rather those dispensary thats why not go harder on the new unit openings in the back half.

So I would I would just I. Appreciate the question I would I would just say that I think we're setting the pace right for that for the state and just remember it takes about nine to 10 months.

To open a new location and so.

We've got and lot of stores in the pipeline, we're continuing to build that pipeline all the time on but we also need to be thoughtful with respect to.

How realistic is for us to press opened stores and then in addition, right and we need to also.

Make sure that the locations that were choosing our strategic in nature, and so where we don't open locations just for the sake of opening locations and Theres a lot of research and analysis that goes on to each of those locations. So that to your point. We can continue to phenomenal unit economics that we had in that quite frankly, it looks like you expect from a straight so.

Good to twofold right, we want to continue to grow we want to continue to grow add up at a certain pace, but we want to make sure that strategic in nature and that we're able to.

We're able to really stand behind those locations once we once we open them.

Thank you very much.

Alright. Thanks.

Your next question comes from line of Eric Delore's from Craig Hallum Capital. Your line is now open.

Great. Thanks for taking my questions guys and congrats on another strong quarter.

First one for me just touching back on those.

Traditional retail metrics that you discussed at the beginning of the call.

You mentioned that patient visits were flat.

From Q1 to April at 2.7, but that you did see a bit of an increasing basket size could you just repeat the basket size that you guys you're seeing in April.

Sure It increased from 125 to approximately 127.

Okay great.

And then I may have dismiss that the last quarter, you guys mentioned a sales per square foot metrics.

Q4 could you share that for Q1, if you haven't.

Yeah, I think that we're hearing on an annual basis. So that's it that's an annual days open. So I do not have that calculation calculated for Q1.

Okay no problem.

Next question for me more on Massachusetts side.

Can you tell you know obviously, we have a bit of a construction delays as it relates to co. Good.

Do you think that those facilities could still open up by the end of this year or is that looking like it could potentially be 2021 thing at this point.

You know that's a bit of a crystal ball question for US at this point you know, we hope to get some additional clarity once we start to see a inspectors actually out and about in Massachusetts. So construction is continuing out again.

We'll be ready I think it's just a matter of the pace of those inspections and when those get schedule. So as we certainly as we progressed through as we have beats as we get feedback on just like we did today. When we received notification that our adult used application was complete well, we'll continue to share those updates with you.

Paul you know real time, but and so I would say that and we're happy that you know the governor has this past week on allowed for construction companies to get back to work and I certainly it appears that the CCC has regained some level of activity.

But I think TBD in terms than our particular timeline.

Okay, Yeah that makes sense, Washington for me here. So you guys, obviously, a very data driven organization.

You talked about some of the data insights you gathered some of your Florida operations and how those insights and give you confidence in building similarly efficient operations.

In Massachusetts, and any other markets that you might enter.

Sure and you know I would say that and if so [laughter] ask for anyone who who would like to I spend today with our our data team and there's there's lots and lots of a models and I'm insights that we that we haven't we look at on a very very regular basis. You know we have we have dashboard gosh.

Words and metrics for just about every segment of the business I'm that we're continuing to evolve and refine and so what it allows us to deal with it allows us to understand because were vertical in Florida each of the different segments of the business and so when you look to Massachusetts, and when we're building our footprint, we very much understand for example.

You know the 100000 square foot canopy I'm restriction that we have in Massachusetts, We certainly understand and believe that we have and a real working knowledge of what how to build and how to lay out a footprint to make it. The most efficient possible then when we go down a product mix, we understand exactly from X amount of yield.

On a particular plant what the different product streams are what the inputs are to those product streams and how to calculate returns on those product streams, whether or not we're on.

Pushing those products through our retail in our own vertical channel in Massachusetts, or whether or not repeating those off into a wholesale business. So I would say just having the understanding and the depth of knowledge in and in a real way and at a scaled way in each of those value streams allows us to appeal Bakken into bottom up model builder.

Moving on for each of these markets that were that were attempting to go into.

Very helpful.

That's it for me Congrats again and thanks for taking my questions.

Oh, thank you.

Your next question comes from line of restaurant Wrestle Stanley from Beacon Securities. Your line is now open.

Good morning, and congrats on the core that.

Thank you for.

Sorry, just around store openings aegis provided some color on on the thought process. It goes into it I'm just wondering youve got to clear clearly you here in a number of your competitors of of course slow down or or very least pause or solve their retail build outs, but that being said I'm. Just wondering how are you finding any any tougher.

Fine.

Locations are you anywhere close to two saturation level in Florida or are there still a lot of prime targets and it becomes more matter of choosing.

The best options first.

Yes anything so the question Ross I would say that we're in a state of 21 million people and we continue to see and increases in the program and certainly of course have our eye on future program expansion.

Through you know potential recreational coming coming online and in a couple of years and so we're positioning both for today and then also with an eye towards the future. So we do believe that there are certainly opportunities to expand that remain but that being said as I mentioned previously and we are.

You know we are strategic about those locations and continue to look for locations that that work. Both in today's environment. And then also you know and some in some instances couldn't be couldn't be relevant for for future for future regulatory changes as well I mean in Florida, you know high level just as a reminder, we're currently.

Our patient count at about 1.4% penetration rate, which you know we think as certainly bodes well in terms of additional runway on future growth.

That's a that's great color. Thanks on that just so one one additional question at this point is you've talked about product mix and haven't launched.

Some flowers strains in book value in premium segments that have done well I'm wondering more generally when you look at the entire product settings, including oils are you seeing any sort of shifts.

With the with the macro headwinds any shifts in terms of customers coming a little more down market in the lower priced options at this point.

You know it's been interesting certainly in Q1 right we saw growth in both premium and in value. So it's.

It's a little bit on both ends of the both ends of the spectrum is is what I would say in there they're quite frankly almost balanced so at least currently now whether or not you know moving into Q2, which is really more.

Core quarter of covert and coming out of Q2, as we sort of shift back to a more quote unquote.

Normalized pattern at least in terms of customer behavior in Florida, whether or not those will shift more towards the value stream. That's something we're watching right I am I understand the the thought there certainly in certainly has blended to the fact that we believe we believe that we needed some additional debt right.

In not value segment, but on for Q1 anyway. It was growth on both top and lower.

That's great I was just I'll sneak one last question just on the M&A fraud, especially given.

Free cash flow being positive in the quarter. Congrats on that just wondering what latest viewers on M&A, what which markets, obviously regulatory environments or are moving target but.

What will be the current short list of the markets like most than and have has actually changed at all over the last three to six months.

The asking threats, so I'm not going to be able to give you as you as you probably know specific stays there specific markets. Although I always appreciate the question.

You know our metrics for for looking at M&A, certainly have have not shifted I mean, we've been fairly constant and with respect to our the way that we the way that we view M&A I think that as we can probably all recognize and appreciate.

The types of M&A opportunities, we are starting to see some changes and changes there with respect to.

And increased in what I would call again, a distressed asset classes and coming becoming available for review.

Again, I think with those just like we do with any any analysis right. We look at and what not only is needed to purchase essentially make the purchase but also what is needed both from a person now on where synergies can be had and also you know what additional dollars would be needed to be invest.

Did to rightsize, you know that particular business. So it's a fulsome analysis and we go back to the stock that.

The U.S. will will evolve into regions and and having hubs in those regions will be strategically important and over the long term. So we're committed to building a business what we consider to be.

You know in a disciplined way so that we can make sure that when we enter we're actually strategically building brand and that we can grow overtime as opposed to merely plantings lives that we then have to retreat from.

Understood that's great color. Thank you again and congrats again.

Thank you.

Your next question comes from the line of Pablos Atlantic from Cantor. Your line is now open.

Good morning, everyone.

Let me ask just following up on then when a question what would you say to people that say that truly being too conservative.

That's helpful to leave the news broke Denison wellness is buying when we feel it's been for these lift in New Jersey.

Obviously quarterly board.

Hi, Rowing Tonight, the going rate three stores that were digging David there I hear your with your very little Beach in three other state. So if again if you can you know how would you.

Respond to that.

Coleman, Doug you guys have been talking filled with you on that maybe you know standing behind.

Yes.

Yeah, I know things for the question Pablo.

My I just point to our result.

So you know a too conservative leads to 51% EBITDA margin.

Teachers Zone, I guess, you know I think that offer us to make sure that were free cash flow positive again that were being strategic and our expansions and look we're in we're still in early innings here and I think that it's been prevent now over the last I would say 12 to 18 months that the land grab strategy for most has.

Not been successful and that it's and it's you have to operate these businesses.

I am very strategically and very focused on financial management, given the fact that we're dealing with 280 and we're dealing with regulatory restrictions and that really make it a state by state analysis, and I think that and we'll continue to believe that Florida is the best state in the country to be in our sitting at over 50% market share, which I think gives us a lot of flex.

Stability as we consider the opportunities and I think my Lucky stars you know daily that we did not complete M&A in 2019, I think the valuation by large where were inflated and I think again, not that's proving out as as a lot of deals get it either abandoned or renegotiated.

In 2020, so I feel like our model and our processes are proving out with respect to how we strategically analyze M&A and I believe that and when we make moves they'll be again defensible.

They'll be solid moves and they'll they'll be accretive to add to not only on the short term, but also for long term shareholder value.

Just to stay on that point in your prepared remarks, you talk about.

Our obligations were licenses for the state level. So as you would only and other states should we think it's been can be more solid organic and goes from getting new licenses.

Buying assets on the ground from to give some color there for your thinking a little bit.

Yeah sure.

I think it's going to be mix I think there's a mix strategy at play and we certainly have markets that.

On our and.

Our certainly we would like to be in that Weve launched and applications team around the and we're not applying in every state that opens an application process right. I mean that goes through the same rigorous analysis that we have for M&A opportunities and but we are and have been participating and in some cases right are participating in ground game in states prior.

New applications being launched and so the applications is can be a longer lead item, but again and we think am can have a very important and additive return on investment and over the long term so.

That's a process that will continue and it's part of our strategy, but thats, coupled with and we remain active in the M&A and M&A conversations as well.

And what if I may.

I think last year at some point when you gave guidance for Twentytwenty, you had said that Massachusetts would be 20% sales from and correct me if I'm wrong I realize that thats more than 2021 story, but that number you know under 400 million Thats about call. It 80 million a year I mean.

Thinking right. The modalities that you would think youre that stayed once you went up and running.

Yeah, I mean, I think said that obviously, the viewpoint around Massachusetts and quite frankly, the viewpoint around Florida has has shipped in in 2020 I'm as Florida has remained.

I am very robust and has an as our team has done a phenomenal job and continuing to execute and quite frankly growing market share.

In in a tough in a tough and increasingly competitive landscape and so you know and and then to your point, we do think that Massachusetts will be meaningfully contributed to both top and bottom line. Once we're able to get that up and running so I think it's just a matter a win.

When you know in how the timing works out, but I'm generally speaking you're correct.

I want to squeeze one more if we can.

Just a quick update on double get authority front in terms of what's happening with wholesale and.

Any color you can do you intend to win any what would happen I know you getting sides agrees to won't bolting.

I would also related to that one question I Didnt go so that risks, it's about purchasing Paul were higher unemployment great people for low salaries is that an issue where you'll demographic lumping footprint will be the population folio advisor product.

Thanks.

Yes, no thinks.

So.

With respect to and you know with respect for the the furloughs and kind of we haven't seen is as we've said right. All I can speak to is how the data is playing out and in what we're seeing at the register and so what we're thinking to register again as basket size, increasing from 125 to 127, so and that's most current.

Permission, we have to the we haven't yet seen rate and.

That coming through but I think as we said earlier, making sure that we have depth in both value and across specific product segment is going to be important and it's always important and to make sure that you're able to meet customers and provide that value proposition for customers, where they are right and certainly appreciate and understand that different parts of our.

Our patient population are probably in our experiencing different realities and their lives and so again, making sure that we are products that can speak to them.

Is important and remains an important part of our remains an important part of our strategy.

On the regulatory front in terms of any news from the wholesale.

Oh, I'm, sorry, I'm, So you know.

No update there right and we continue to be and I think it's you know if you're in if you're in if your cannabis.

Executive.

In the U.S. right I'm one of our key hallmarks is the fact that we have to have plans.

AB all the way probably to to Gnh rate and so you know as we've said before and we certainly had strategies and plans around and when or if wholesale becomes available and the Stena, Florida. Certainly you know again speaking to our product apps, our inventory unveiled a bit availability to turn.

And cultivation up and down and how that flexibility.

Around production is our important important drivers there potentially and then with respect to edibles and you know I continue to be assured that that the process is moving forward our prior to kobin hitting so I do think said it's a question that's more linked at this point to Covance and resource Ali.

Occasion on the Department of Health side, then and then not so I think that it's dependent on.

On when they feel that they are sufficiently through that and have the bandwidth to to release those rules, but I do feel optimistic and im still hopeful as we all are that it will be a 2020 event.

Got it thank you.

Alright, Thanks Palmer.

Your next question comes the line of Jason Jason Sandberg from Pi Financial Your line is now open.

Hi, Tim.

Most of my questions have been answered, but I've got a couple here.

Yeah.

How would you say that same store sales growth.

Was 27%.

Quarter.

Do you have data for just the last few weeks of March according to the covert situation.

Unfortunately, Jason I don't.

Okay. Okay.

Okay, but will provide us well reported quarterly so.

And I can I can potentially pull that and happy to have.

A separate conversation Oreo.

Perfect and then and then just on.

On edibles.

No I think.

No one really knew how flower would.

The industry before it was.

Released.

Apart from the spin at absolute success.

Just wondering what your thoughts are on how.

You expect edibles to impact the Florida markets.

Do you get lot of feedback from customers that are that are eagerly awaiting the launch you do you expect.

Some pretty strong demand once talks launched.

It should be great.

Yes, no. Thank you so much for that question, we do have I have folks ask about it very regularly.

And you know currently there is this a cottage industry around you know recipe training folks that are.

You know, making their own edibles with our distillate products and so we do believe that add that there is a strong marker for edibles, our internal projections looking at.

You know anecdotal feedback like I, just gave you along with other markets and.

No statistics around around edibles and demand and we would estimate internally that you know anywhere from 20% to 30% of product mix.

Could shift to to animals, and we think it'll be a combination of folks to perhaps we're buying and products again to make their own I'm shifting to finish finished main animals as well as additional add ons to baskets rates that we think that it's going to both grow the market in general on that.

Also shifted a bit as well, but as you know edibles are fantastic product from a margin perspective.

We're very much looking forward to the the additional product availability I'm going and finally I would just mentioned that you know thats been strategic part of our our business as well is making sure that we've got on both the inventory from a raw material perspective oil to on to be able to supply that animal segment when we.

I don't know right and how it will affect other business lines and also making sure that we've got the and the availability to have a full product lines. We've got.

30, plus skews ready to launch and across a variety of form factors and one edibles is available to to selling Florida.

Okay, great. Thanks, very much and congrats on hitting a burden score.

Thank you so much.

That is all the time, we have for questions today I would now like to turn the call over back to men Ricci. Please go ahead.

Thank you and thank you for joining US today, we look forward to update you on our progress again next quarter have great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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