Q4 2020 Terrascend Corp Earnings Call
Yeah.
[music].
Good morning, My name is Joanna and I will be your conference operator today at.
At this time I would like to welcome everyone to the person Corp, fourth quarter 2020 financial results Conference call all.
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For the speakers remarks, there will be a question and answer session.
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Not on the line over to Dan Foley Senior Vice President of Treasury and Investor Relations. Please go ahead.
Thank you Joanna and good morning, everyone welcome to tariffs in the fourth quarter of year end 2020 conference call for the free in 12 month period, ending December 31, 2020, joining us for today's call is Jason while the executive Chairman he stopped our Chief Financial Officer, and Greg Laughlin, Chief Executive Officer of northeast Operation operations.
Listeners are reminded that certain matters discussed on today's conference call or answers that maybe given to questions asked could constitute forward looking statements that are subject to risks and uncertainties relating to tariffs on future financial or business performance actual results could differ materially from those anticipated in these forward looking statements. The risk factors that may affect results are detailed on tariffs and M D.
And the other periodic filings and registration statements. These documents may be accessed via the theater database I'd like to remind everyone that this call is being recorded today Tuesday March 20, <unk> 2021, I would now like to introduce Mr. Jason Weil. Please go ahead.
Good morning, everybody and thanks for joining us today, but for.
Where we get started I'd like to say of course, thank you to Jason the argument for his contributions during his time with terrorists and as CEO and executive Chairman.
Half of the entire team I'd like to.
All of the best in the future pursuits.
Now onto the results 2020 was the tremendously successful year for <unk>, we reached new heights across many financial and operational.
Indicators quarter.
After the quarter throughout the year.
For 2020 has certainly been an incredibly challenging year for the economy and the country in the world.
Due to the COVID-19 pandemic, our team came together and executed on all fronts for our customers patients consumers shareholders and the communities in which we work.
The results of this execution are reflected in the strong top line growth continued gross margin expansion further SG&A leverage and strong cash flow generation for the quarter and the full year.
These improvements drove our profitability to among the highest levels in the industry with adjusted EBITDA margins, reaching 40% in Q4.
We achieved this milestone even faster than we expected on the strength of our execution and operational excellence.
Looking at our growth plans for 2021, we will continue to focus on building depth and scale as we expand our footprint and attracted.
For active limited licensed markets.
We will also continue to strengthen our capabilities by adding talent across the business to support this growth.
While we continue to scale to meet current and anticipated demand in our markets. We have not lost sight of our core focus on being financially disciplined our goal is to build on the outstanding financial success of.
2020.
On the strength of this positive momentum we are confident in raising our guidance for 2021, which Keith will discuss shortly.
Turning to an overview of our operations.
Pennsylvania, we continued to distribute our branded products through 100% of the dispensaries in the state and.
In addition in Q3, we further expanded our cultivation capacity at our <unk> facility by 25%.
This increase the capacity began contributing to revenue mid midway through Q4, and we are happy to report it immediately sold through.
In addition to expanding our cultivation footprint. We are also increasing our production of output through improved deal as an example output as measured in grams per square foot of canopy space increased by 36% from Q4 of 2019 for Q4 of 2020.
As a result of our cost per pound has continued to decline, thereby enabling margins to continue to expand.
With our customer centric philosophy, and our focus on first class service, we have seen demand for our products remain robust and we therefore begun work on further capacity expansion in 2021 to fuel further growth into 2022.
Sales of our three retail dispensaries in Pennsylvania have continued to grow at a robust rate.
Our three stores are performing well above average levels per store in the state with run rates increasing of 33% in Q4 sequentially.
Patient satisfaction levels are high with customer return rates, increasing 37% and patient counts increasing by 24% in Q4 sequentially.
The success of our business is ultimately decided by customer satisfaction.
And meeting patient needs and to that end, we are constantly working to deliver innovative new products and brands. For example, we recently introduced the country brands to our east coast markets.
<unk> is the brand dedicated to producing <unk>.
Exceptional cannabis with respect for the Earth and love for the plant.
Cytori joins our existing brands.
<unk>, which is more medically focused on prism, which produces high quality concentrates.
Yes.
Turning to New Jersey.
We're continuing to execute on our growth strategy, there and width and the.
Are very excited about the passing of adult use legislation.
We believe we are extremely well positioned in this emerging an underserved consumer market.
Our current medical cannabis business in New Jersey is now fully operational for.
Performing well and we will be prepared to service the expanded market with a broader array of products when adult use sales begin later this year.
We have completed several harvests from our 40000 square foot greenhouse and boot and New Jersey, and we commenced sales from the greenhouse in late Q4 in.
In addition, first harvests have been completed for our new 80000 square foot indoor facility co located important as well.
We also announced last week that we had been awarded of permit to process and extract at our facility, which gives us the full capacity to sell a wide array of manufactured products.
We anticipate the first sales into the market for our indoor harvests and and the extracted products will begin in the coming weeks.
At the end of November 2020, we opened our first new Jersey retail location in Phillipsburg and.
And I am pleased to report that it is ramping quite well.
As the only dispensary in Warren County, and one of the only a few dispensaries in north Western New Jersey, we've seen great foot traffic in the store with some patients traveling more than of our to access our high quality products.
Our second and third dispensary locations in New Jersey are on track to open in the second quarter and the second and early in the third quarter respectively.
The stores will be located in the densely populated New York City commuter card or in the northeastern part of New Jersey.
And Merrill Lynch, we are actively preparing to assume control of.
For the HMS business.
Once we receive final regulatory approval, which we expect in early Q2.
Our entry into the $600 million of Maryland medical market further strengthens our foundation on the East Coast.
We look forward to leveraging our scale strong portfolio of manufactured brands and veteran northeast operation teams, who also oversee our new Jersey and Pennsylvania operations.
Over time, we expect to achieve full vertical integration and assume a leadership position in this growing market.
Turning to the West coast, the operating environment in California remains challenging due to the ongoing COVID-19 situation and the state. Our recently opened fourth and fifth the California stores and Capitola and Berkley are gradually ramping up under these conditions.
We expect conditions to improve as COVID-19 restrictions ease and the foot traffic recovers in these areas.
Our recently expanded state flower indoor cultivation facility in San Francisco continues to.
To perform well.
All expand the capacity in the us and selling through.
Its expansion significantly increased our ability to supply our ultra premium day flower products into the wholesale market and into our own apothecary on dispensaries.
In Canada the <unk>.
Turnaround of the business there is progressing and we are seeing further signs of success from the implementation of our clear and focused business model and strategy that is aligned with the current market position conditions.
As an example on we're pleased to share that for the fourth quarter <unk> Hayden Street Indigo days three five Gram jar SKU was the number one selling SKU out of 506 in the dried flower category in Ontario.
As Canada's largest cannabis segment of our market.
The dry flower category represents over half of all kind of the sales in Ontario.
With our improved commercial focus on streamlined product portfolio, we feel confident that our strategy is on the right path in Canada.
To summarize 2020 was an incredible year for tariffs and we delivered record results and our teams successfully adapted to serve customers, while maintaining high levels of customer satisfaction during the Covid pandemic.
I am extremely proud of the everybody's hard work throughout the year.
With the strong footprint, we have established an attractive states such as.
In New Jersey, along with the anticipated.
Closing of the EMS, Maryland, we plan to continue to execute on our growth agenda in 2021.
With the adult use legislation now past, the new Jersey, and increasingly being discussed in Pennsylvania, and Maryland, we are well positioned for future growth and we look forward to updating you on our continued progress throughout the year.
I would like now to turn the call over to Keith who will discuss the financial highlights for the quarter as well as providing updates to our financial guidance.
Thanks, Jason and good morning, everyone.
As a reminder of the results I will be going over today can be found on our financial statements and MD&A and are expressed in Canadian dollars unless otherwise noted.
Net sales increased 152% to $65 3 million in Q4 versus year ago and increased 28% sequentially.
This significant growth in revenue was primarily driven by recent cultivation expansion in Pennsylvania and California.
Our first sales in the New Jersey market and the continued growth and ramp up and our three of Pothecary of dispensaries in Pennsylvania, and the two new locations in California.
Regarding net sales by channel, we grew our branded manufacturing business in Q4 by 30% sequentially and by almost 200% versus a year ago, while we grew our retail business by 24% sequentially and by almost 100% versus a year ago.
<unk> manufacturing with its healthier margin profile represented 70% of our revenue mix and full year of 2020.
Adjusted gross margin for Q4 was 60%.
Paired with 59% in Q3.
Note that adjusted gross margin is a non-GAAP measure, which excludes fair value of biological assets and also excludes of Q4 inventory impairment in Canada, which is the nonrecurring item.
The sequential improvement in gross margin is the result of cultivation yield improvements in Pennsylvania as well as continued increase in mix of the Pennsylvania related to our additional expansion there.
We have maintained our strong focus on cost focus on cost control with SG&A expenses growing 10% sequentially relative to the net sales growth of 28%.
As a percentage of revenue SG&A further improved to 23% in Q4 compared to 27% in Q3.
With these improvements.
We remain at or near best in class levels of SG&A leverage in the sector.
Our strategy to go deep build scale and leverage our cost structure teams and capabilities remains a core operating tenant that drives the strong leverage.
Q4, adjusted EBITDA grew 46% to $25 9 million compared to $17 8 million in Q3 further demonstrating the leverage present in our business as we continue to grow revenue.
Adjusted EBIT margin improved to 40% in Q3.
From 35% of in Q4 from 35% in Q3, 24% in Q2 and 14% in Q1.
The significant quarter by quarter improvements are a clear indication that our focus on scale and cost control is driving profitability level levels that are among the highest in the industry.
We expect this progress to continue throughout 2021, as we ramp up our new Jersey business and continue to expand and gain efficiencies in Pennsylvania.
Adjusted net income of.
Our non-GAAP measure, which excludes fair value of warrant liability and revaluation of contingent consideration increased by 56% sequentially to a positive $19 9 million for the quarter.
Turning to the balance sheet.
We ended the quarter with $75 million in cash.
We completed two debt financings in December.
The U S dollar 20 million loan from canopy growth to our arise Bioscience division in the U S dollar $120 million term loans secured by our Alere of healthcare Division.
Towards the end of December we paid of U S dollar $106 million towards the final earn out payment for the acquisition of <unk> with the remaining U S dollar of 30 million deferred to.
At June 30 of this year.
To year end, we closed on the Canadian dollar $224 million equity operating further bolstering our balance sheet beyond the $75 million cash reported at year end.
We feel confident that these recent capital raises combined with our strong cash from operations generation per.
<unk> with the balance sheet strength necessary to execute on our organic expansion plans and on our M&A agenda.
Speaking of cash flow from operations. This result has also been improving throughout 2020.
As a reminder, in the second quarter of 2020, we reported our first quarter of positive cash from operations at $10 million.
In Q4, we achieved a positive $24 million in cash from operations, resulting in $33 million.
For the full year.
Capex spending during the fourth quarter was approximately $20 million compared to $18 million in Q3.
And $61 million for the full year.
Capex was largely related to the build out of our cultivation facility in new Jersey and to a lesser extent the opening of new stores in California, and cultivation expansion in Pennsylvania and California.
The spending complete the full build out of our current footprint with the few final payments due during Q1.
Free cash flow net of Capex was a positive $5 million in Q4, which is the first positive free cash flow result for tariffs and.
We're pleased to report that we achieved this milestone one quarter earlier than our internal expectations.
I'd like to note that due to the timing of certain payments tax payments and capex payments going forward free cash flow may continue to be choppy on a quarterly basis the can.
<unk> to improve over time, which is only natural given our phase of growth and the significant continued opportunities to invest in extremely attractive.
<unk> projects.
Lastly, before turning the call over to questions I'll take a few minutes to discuss our 2021 outlook and guidance.
2021 is shaping up to be a very exciting year for <unk> and we expect to continue to achieve rapid growth and expansion we.
We anticipate continued growth in our Pennsylvania business with Q1 2021 being the first full quarter. Following the completion of our increased cultivation expansion.
New Jersey will be of leading growth driver for us throughout the year as we realize the full capacity of both the 40000 square foot greenhouse and the 80000 square foot indoor facility as the operation ramps throughout the year.
It is important to note that we do expect the scaling and growth in this new capacity to the second quarter and back half weighted as the operation continues to come online throughout the year.
For New Jersey retail Q1, 2021 will be the first full quarter of sales from our Phillipsburg dispensary and with the openings of our second and third dispensaries in Q2 and early Q3, we expect to see further growth in the back half of the year from these stores.
In California, we will fully annualize the late Q3 2020 expansion of our state flower cultivation facility.
And.
We will see continued growth at retail with the further ramp up in our fourth and fifth stores in Berkeley, and Capitola, which opened in the back half of 2020.
With our optimized business in Canada.
We expect to see positive contributions to both sales and EBITDA growth in 2021.
And finally, our recent acquisition of HMS, Maryland will begin contributing to our sales once we have the required regulatory approval for closing of this transaction, which we expect in the early second quarter.
Note that our 2021 guidance does not contemplate any expansion of the Maryland assets.
Though we do plan to expand the operation of Maryland during 2021, which will contribute to 2022 financially.
Turning to our financial guidance, we plan to convert from Canadian dollars to U S dollars as our reporting currency of effective with our Q1 2021 reporting cycle.
Also work is well underway to prepare tariffs and to become the U S. Domestic filer with the SEC under U S. GAAP later this year.
In addition, we are preparing to meet the requirements necessary for our securities to trade on a major U S exchange if laws should change in the future should permit us to do so.
More to come as we progress on all of these fronts.
Finally, as the as a result of all of the strong growth drivers outlined here and our conversion to a U S. Dollar reporting currency, we are raising our guidance for 2021 and converting it to the U S dollars.
Our updated guidance reflects our expectation that we will exceed the high end of the previously announced guidance.
Revenue is expected to exceed.
$290 million and adjusted EBITDA is expected to exceed $122 million.
Leading to a full year EBITDA margin of at least 42%.
Note that way of converted our 2021 guidance for U S dollars based on an exchange rate of one.
1.3 dollars 82, which prevailed when we originally issued our Canadian dollar guidance on November 19th.
To close we're very excited about our strong finish to what has been an extraordinary year for tariffs and and are even more excited for what is to come in 2021.
I would now like to turn the.
Call back to the operator to open it up for questions.
Thank you ladies.
Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone you will hear with free Tom price acknowledging of of quest.
You are using a speaker phone please lift the handset before pressing any keys.
And the reminder, we do ask that you please limit yourself to three questions.
Next question is from Ken Mackay at ATB capital markets. Please go ahead.
Thank you and good morning.
Jason I mean, congrats to you on the team on the on the prints on the guidance revision of which I'll get to in my my second or third question I think top of mind, the small and for everybody is obviously going to be the surprise announcement on just macro of index. It is they're recognizing that probably limits on what your account of we'll say is there any additional color you could provide us on sort of how we went from the.
Yeah and in pretty short order with respect to you guys. Since the exit just such that we can better understand the dynamics at play on some of the rest of the perhaps the.
That imputes for the rest of the year.
Sure.
I think that it's the start sort of with the end of your question first of I don't think of that it should indicate to anybody that theres any risk as it relates to the for the business things are going very well they are having.
We have been exceeding our own internal <unk>.
<unk> forecasts.
So.
Jason the exit has nothing to do with the.
With the success of of the business or how we've been executing I think.
It's really just comes down to a difference in philosophy over over management style.
On culture.
That's really what it comes down to.
<unk>.
I feel.
A lot better debt, we were able to.
To do something like I don't feel I don't feel good that we did this but what I'm, saying is I feel better that the company as such it is such a strong position.
And it's and it's not in any way an indication of.
Jason's exiting they've not the any way an indication of of anything.
Anything that's wrong with the business.
And.
Maybe on the board just felt like.
Like it wasn't going to work out.
And.
To me the.
The best time to do something like this is when the when the business is running really well as opposed to.
If we were if we were going through some going through some troubles. So sorry, it probably doesn't fully answer all the questions you have about that but.
Right.
Please don't take it as an indication that that anything is that theres anything sort of lurking beneath the surface.
The business is doing great. We've got obviously, a big ramp in revenue coming on this year and a big ramp in the profitability of margins.
And we just decided that at.
That it wasn't going to work out with with Jason and we decided to make the move.
That's great kind of addressing thank you and just just if I'm understanding you correctly, it's not just the function of the momentum you have the conviction of confidence you have on the the bench strength that.
We'll see a low limit any potential risks from the extra does that of the correct way to characterize what we'll think about this in terms of you do have that debt and you know if they would it be time between here and there in appointing a new CEO of that.
And impute to any potential slippage.
Yes. Thank you. Thank you for project net application I should of pointed that out that are that we have some really strong executives at the company.
And everybody is really stepping up and and has.
There were so many people then of the deep operational knowledge of the business at this point just to call out of few.
And people that we have on the call here today, Greg Rockland, who is the who started started I layer on in Pennsylvania.
So that business for us on has stayed on and has been running the the northeast for us the ever since now probably about a year and a half.
He is.
The extremely involved in the business.
And we'll be stepping up even more so in.
In the in the.
The coming days he's on the call and he is going to be available to answer some questions keeps.
Keeps it out for our CFO has been the with the business since the first half of.
Of last year, and now has is fully up to speed.
And has been a.
Really stepping up and making a.
The great contribution.
For the business.
And I believe you also have just the marks are cheaper.
Legal officer.
On the call as well although.
I don't think we're going to have too many of legal legal questions, but he is.
I've really been happy with the involvement debt.
He has taken in the business.
Over the over the last several months.
He is much more than just the chief legal officer. He is he's a.
He's a lawyer, who really understands business as well and deserves the seat at the table and we've definitely.
Been inviting them to the table much more so than those of you sort of three of the top executives.
I think the signal or our bench strength.
And you know I.
I don't have any doubt.
The Guy that these guys are going to are going to continue to execute on when it comes to funding of CEO.
We're not we're not in any we're not on any rush I mean, the business is running well.
And the and we've got a great team so theres not its not like there is no fire drill going on here.
We are looking for for candidates and we think that we'll be able to bring somebody in.
Overtime.
And the who's going to who is going to be able to contribute.
Strongly to what the rest of the team brings.
Thanks for asking that the scratch here on the quick final one for me just with respect to your guidance.
It doesn't it sorry. It does not include any assumed contribution from new Jersey rack, but is it reasonable to believe that given the expectations around timing of that could potentially provide a buffer if new Jersey Rex does actually come on line in the fourth quarter of given that it's not in your 2021 guide how should we think about the ever.
Elution, there and how much how much room, there might be on from a guidance perspective.
Sure I don't know that I would describe it as a buffer I would describe it more of as upside.
I mean, we this guidance as is.
<unk> does not assume any rec sales so that would be additive for the.
Sales kick in in Q4.
We're not sure exactly when the when it will kick in and we've been hearing.
Essentially sometime before the end of the year so.
So we did not include any indirect sales and that would just be additive to our kind of guidance that we've provided today.
Thank you. The next question comes from Glenn Mattson of Ladenburg Thalmann. Please go ahead.
Hi, yes, thanks for taking the call so.
Very nice job of unusual on the profitability. So I'm curious just about.
You, obviously guided for a higher profitability next year.
Is there can you give us some color of some some level of understanding as to how much New Jersey is like detracting. It as of right now from profitability and how much once that kind of flips over to more revenue producing how.
How much the benefit you'll get from that swing.
And then just on the you know on.
On the operating side.
You do run some of the highest margins on the industry. So can you give us.
Some confidence that.
It's just great execution of not that youre kind of like starving the business for <unk>.
For profitability now that could that could.
B.
Harder to overcome in the future.
Sure Keith you want of him answer that question.
Hey, Glenn Yeah.
So on on the first part of your question I would say broadly speaking of New Jersey. At this point is a net of net neutral and so what youll see as new Jersey kicks in with the other.
I'd say equally at least equally attractive profit profile to.
The Pennsylvania is that's what's really going to drive our continued to drive our margins upward through this year.
So we have we started selling.
Some in Q4, that's in our numbers and that offset some of the startup costs and it's broadly neutral I'd say in the Grand scheme.
And then.
Yeah, and then for the second part of your question I think I kind of answered it which is.
With new.
The new Jersey kicking in throughout the year and will become a very material part of our of our business with the profit profile.
At or better than than Pennsylvania over time, given pricing differences as the wholesale in the market.
That that should continue and then I think the other part you alluded to is really starving the business, where we're not starving the business.
We.
We just have I think of unique business model with the depth and the scale of that gives us.
<unk> gives.
Gives us the margin profile that we have and then we continue to invest in our capabilities and.
In.
Corporate areas and other SG&A related areas as the as we feel the need to.
To build out capabilities over time, so as you see in this quarter, we grew our SG&A to 10%.
But we continue to grow revenues at multiples of that rate and we continue to plan the.
Operator with that cost consciousness overtime, but making sure we don't starve the business.
Great Yeah. Thanks, the one thing and then.
Sorry go ahead, Jason the Oregon, I was just going to add one thing more just from a qualitative perspective I guess.
I think part of the reason that our that our profitability margins are.
So so good or.
The high end of the sector is partly in my mind, because we are a lot newer.
Then a lot of the other companies a lot of our competitors.
We just have the last we've built of less sort of infrastructure and less people on.
Over time.
Yes, sometimes on businesses around for a long time, there's people there might be some people still there that that wouldn't have been the era of the company was the was just you know started more from scratch. So I think that that's the that's not really of quantitative huh.
Answer, but I think that thats part of it we just the having the habit.
We just haven't needed and have them built up the <unk>.
Of the staffing levels at some of the other.
Because of course.
Yes.
Yeah, Okay, great. Thanks.
That's good color there and then on.
Just moving on to Maryland, just can you talk about.
What kind of expansion plans you you talked about some investment of 2021 that like the contributes in 'twenty. Two can you just give us some sense of what the thinking there.
Sure I think that that'll be great question for Greg Rockland to answer.
Sure. Thanks, J W Hulme of Hey, Glenn.
So we're on we're looking forward to.
Hitting or getting out of license from through the Maryland for one.
On the docket for for late April and once the on once we have that in hand on our plants are too.
To take advantage of the availability to expand the facility.
Pretty dramatically we have we have some.
Very nice clients, we've hired a very strong on GM there.
And we're on and we're really looking forward for the Maryland market.
Many of the lives in Baltimore at times, it can be very nice to be doing business in my home state.
Yeah, Greg it's been the Greg has been a pretty much every week from from the day that are required on the layer of.
Greg has been asking me when are we getting the Maryland assets.
This was.
This was definitely a partly oh I don't want to say the chip, but I was very excited to be able to for us to be able to bring us home for for bridge.
Something that was backyard as opposed to driving for hours have the Pennsylvania.
Alright, alright. Thanks.
Maybe I missed the last thing for me with just the on Canada. How did you say if it was profitable and to what level of improvement from last quarter I might have missed that but that's it for me.
Sure Keith.
Yeah. So.
We continue to progress in Canada, we don't breakout.
Those details, but we.
We did I mentioned, we had a one time impairment item.
On on inventory in Canada, but otherwise, we're really happy with the direction things continue to head in Canada like Jason mentioned, we have the we have some top selling of Skus.
Our commercial focus in our focused product portfolio is much improved and our cost structure is now aligned with all of the work that we did last year or the.
Yes in 2020.
And so the path forward like I've mentioned in my in my guidance comments, we have expectations for Canada to continue the progress both on on top line growth and on having a profitable books of business through 2021.
Thank you. The next question comes from Andrew of price Daniele <unk> of Stifel. JMP. Please go ahead.
Hi, Thanks for taking my questions and congrats on the good guidance here.
If I could just touching back on.
On the CEO change.
Could you talk a little bit about you know.
In terms of management style and culture you know.
If you could give a little bit more color on.
Kind of.
What were the differences there and when you are looking for.
Your new CEO.
What exactly are you going to be looking for in terms of management style of qualities.
What are your top criteria in choosing the new CEO.
And any more color that you can you know.
It would be useful.
Sure Andrew I would say you know I don't really want it I'd, rather not get into the differences.
Sort of management style of our culture, because then it's going to see them of like I'm, saying that the what.
What you know what what millions of the and the board.
The preferred was was sort of the right way and the.
And what Jason the view was of.
Of how to deal with that with the wrong way, so I'd rather not.
You don't get much deeper into that.
<unk> of.
Somebody of that in terms of the candidates that we're evaluating we'd like to find somebody.
That was the experience guiding large.
Tumor companies through through you know.
Extremely.
Hi per rig.
The of growth.
So it would be somebody somebody with CPG experience.
Somebody with overall large company.
<unk>.
And somebody to.
Really the complementary too for the great of executive assumed debt, but we'd have the we have right now.
Yeah.
Thanks for the additional color of cognizant.
You can only provides so much on on today's call.
And in terms of the.
The 2021 guidance you already talked about how new Jersey Rex could provide upside.
Could you could you talk about you know your production now are you guys selling everything you can produce.
And if.
If you are.
When <unk> hits.
How exactly do you see that the demand curve changing or the or the sales curve rather changing.
Could you see.
Significant increase in prices.
Im just curious.
If things are running on all cylinders now when records and that strong demand hits.
How should we think about sales changing our margin moving.
Sure I think.
In terms of as we look at the medical versus Rec. Our our view is that we are going to sell everything that we color.
Cultivate and manufacturer, whether it's medical or rec.
So it's really a matter of the difference that we're going to see is going to be once once the adult use the kicks in is going to be retail sales.
Those sales should increase significantly under under adult use vs versus rack.
That's really the big draw the that's really going to be the big driver of it is going to be essentially it's gonna be us selling more of our wholesale products through our own stores.
We're obviously, we're going to be booking are much higher.
Much higher amount of revenues, if we if we sell of all the way through essentially yes.
The sale.
I can tell you I'd like to throw it over to Greg in terms of.
The first part of your question about where we are now in terms of production on selling some of them through everything that we can that we can make.
Sure, Thanks, Jay and true Gray.
Question, where we.
Quite a few different.
Levers that were going on we're looking to pool for when the adult use one of the one of the things out of the Jay and Keith mentioned earlier, we are continuing to expand our existing.
Facilities in Pennsylvania.
Some expansion plans and.
In New Jersey, as well and of course as we just discussed the Maryland that that really is in preparation for adult use.
And in the states when that when that's available we also have a very.
Strong culture of innovation, where we are continually coming out with the new products and new forms.
One example of that is our prison line or which of course are on our call.
The trade line.
In New Jersey, we're looking forward to taking advantage of the existing the hollow brand and expanding our edibles lines on all of which help for them.
Some of our high profit margin.
Items and so we're we do believe that we are setting ourselves up for a for a really nice bump when adult use on happens as as Keith and Jason mentioned this is not in any of our guidance.
For any of our numbers currently vote on or we do we do expect to see a on them.
Nice bump when those markets too.
Really flipped to adult use.
Yeah.
Thanks for that.
Maybe one more on on a housekeeping item could.
Could you just confirm the exchange rate that you guys are using.
When converting the euro 2021 guidance to USD.
Yeah, Andrew Hi, Keith.
Yes, it's 1.3082.
And.
We have the slide on that I think the was up on the screen for those who are looking when I was talking through it and we also have it clearly footnoted in our press release and the the thinking there is.
Is just the.
We introduced our guidance in Canadian dollars back on our Q3 conference call that was the exchange rate so.
That was the right rate to convert into the U S dollars.
Yeah, just to add to that a bit and true.
We originally.
The business is the vast majority of our businesses in the U S dollars well over 90%.
When we do our own forecasts, we forecast them in the U S dollars and then we converted in the REIT.
Say in November when we did the start guidance, we converted it to Canadian dollars.
But the real the way that we're booking all of the sales is in the U S dollars. So.
We so in our view on our real guidance was what we based it off of.
At that conversion rate it is.
It's a it's just a matter of the the way were reported yet but there is we actually don't have any FX risk.
As it relates to.
As it relates to the business there.
Thank you. The next question comes from Evan Greenberg at Needham. Please go ahead.
Alright.
But thanks.
Thanks for taking my question.
The first one is on the going back to the Pennsylvania expansion you said, it's already underway I believe.
Hum.
The facility I believe it can go up to 30% is that on facility size of canopy square footage and Mike can you see that starting to hit revenue. Thanks.
I'm sorry, I meant you were starting up just a little bit could you. Please repeat that question.
Hi, Yeah, just better.
Yes, let's see it was on the convention expansion I believe you have another 30%.
In Pennsylvania, I think you said that is currently underway.
For the 30% increase on facility size or kind of the square footage and when could you see that come on line.
So with that it is accurately on on do you want me to go check.
Yes, absolutely.
So evan thanks for the question.
The expansion is actually a it'll be from current footprint, including what we're doing part of what we're doing is as renova.
Renovating our existing greenhouse into an indoor facility. So we will be able to not only increase the square footage, but increase the grants per foot.
And you know on our yields.
And that will that'll be completed but both all of the expansion will be completed this.
This year and we'll really have all of it will really hit our of revenue.
You know very late this year early next year and again this was not an IRR of 21 on guidance itself. It's the 22 for that from that perspective.
Active.
Okay got you that's helpful. And then my second question is.
There's some other operators on the calls have mentioned weather related issues in <unk>, particularly on the east coast in February due to cold weather and snow have you seen the notable impact from that or does it not really not material so far from what you're seeing.
Yeah.
Good day, and I apologize for you.
We have a little bit of a tough connection could you repeat.
Yes, yes, yes.
I heard the I heard the question Greg is the guidance I can answer that this is Keith.
We really have not seen a notable impact.
Really the materially impacting anything from the from weather.
In the first quarter.
Okay, great that's it for me.
Thank you. The next question comes from Noel Atkinson Clarus Securities. Please go ahead.
Good morning, guys, so really well done in Q4, thanks for taking your questions are for.
First off on.
Could you talk a bit of of.
The potential financial benefits, the tariffs and if the safe banking act passes and there's termination of <unk>.
Should I take that share kw, yeah, Okay. Yeah go for it.
So.
There's kind of two parts to that question in a lot of the debate about it right.
On.
The safe banking.
As I as I think we all know has multiple potential benefits the cost of capital being one of its hard to handicap exactly how much that could be worth but I think we it's clear kind of what we borrow at.
And what our cost of capital is an end and that could come down from.
And of the low to mid teens down into the single digits and be worth the.
Several million dollars on that front there are signs of theirs banking fees that are maybe less material, but they they can come down as well and then to a D. The <unk>.
Well, Matt there is.
Look at our SG&A expenses, and take 30% of that and and and that is how much.
The savings we can get on a recurring basis, so quite of bit of.
Unlocked value there potentially into our.
And our market cap so.
Hopefully that answers the question okay great.
Secondly are you guys able to give us sort of of relative production capacity of what you have in New Jersey vs. Pennsylvania currently.
Sure Greg.
Did you hear that.
Yes sure of course, yeah.
Okay.
Right now right now we have approximately two thirds the capacity on.
And Jersey that we have a N P a before the.
For the expansions N P. A that we are we were just discussing so we have on we have really a good amount of capacity between the indoor on the greenhouse and really looking forward for that program continuing expansion.
Putting together our opening our second and third of dispensaries to really be able to.
Get the quality candidates into the hands of indications, the new Jersey, but that really need it and then of course are moving into the adult use market. So we're on we're extraordinarily bullish on New Jersey.
Okay, great. Thanks for that and then finally.
Jason maybe you could talk a bit about the.
What's your M&A pipeline looks like and in general terms right now it seems like there was a very busy activity along the east coast in Pennsylvania, Massachusetts, Florida on you know, what's what's your outlook there.
Sure, Yes, we are definitely looking at the many things.
We hope to be able to.
Announce some some things in the Mexico and the.
Next the few.
A few months.
But there's definitely a lot of opportunities, even though prices have.
<unk> gone up some but there are I think that that's one of the areas, where we excel is finding not necessarily going on going after the assets.
That everybody knows of but you know sort of turning over a lot more rock and finding it.
Great assets and create operators on.
On a sort of on the single state.
Level.
And very often.
We're able to get you're able to get those assets, if you're willing to sort of couple of them together.
You can get better assets at better better prices.
Then just the sort of.
Looking at the at the same once the that everybody else is looking out of the ones that bankers are showing around so I think our pipeline is really strong there and we are you know.
Theyre never done until they're done obviously, but we would hope to be.
The announcing.
You know at least the at least one deal in the AR.
In the coming months.
Thank you. The next question comes from Andrew sample at Echelon capital markets. Please go ahead.
Hello, and congrats on the quarter.
Thank you.
Just wanted to ask on the decision to raise the 2021 guidance so earlier in the year.
Was there any new information that arose in Q1, the kind of supported your confidence on the guidance.
Perhaps maybe some of your businesses, maybe ramping more quickly than previously expected or maybe you're more confident in being able to deliver on the new Jersey.
Some of those factors that'd be appreciated.
Sure Keith you're one of the doctors like the yeah, Yeah sure Hi, Andrew.
I'd say, there's really two main elements there.
One is the continued ma'am.
In Pennsylvania that just continues to surpass our internal expectations as Jason alluded to earlier, we continue to beat our forecast internally.
And then the second major component, Andrew you alluded to which is a.
Being granted the the processing license in New Jersey was sort of the final.
The step in unlocking the full potential and capability of our business in New Jersey for the rest of the year. So.
I'd say those two were the the main ingredients into us being confident in raising the guidance.
Great that's very helpful.
You also called out the strong same store sales or sales growth in Pennsylvania in your prepared remarks.
I'm just wondering how important was the expansion to your production facilities.
The two underway within the fourth quarter to ensure adequate supply for your owned dispensaries.
Was that of factor to supporting retail.
The retail store growth or whether the other primary factors behind the increase in retail sales.
Correct.
So the great question.
The combination of both we are we saw strong demand is quite a bit more patients that have actually entered the market in in.
Sylvania, we're on we're currently supplying 100 per cent of the market every dispensary in the in the state.
We continue to do so we have great partnerships, where we are you know we supply some of the other msos in the supply us as well as well as the local for local suppliers.
In that state and on and again you know of.
Lot of it had to do with real Chuck just overall growth in Pennsylvania on the patient growth.
It's been a it's been a really strong straight stake obviously and we're on we're poised to really be able to.
So if the leverage that and on.
Our Luckily our products in our stores and our incredible staff have done just a wonderful job, especially during the pandemic and extremely difficult.
Time to to really pivot to whether it was a drive thru curbside.
Making sure that we met the customers and the patients where they want it to be so that we were continuing to be best in class.
From a service perspective, as well as the quality of the product. So it went for a confluence of of all of those things that really allowed us to experience that.
That's impressive growth.
That's great and another quick one if I may just what youre seeing on the ground in New Jersey has there been any change to the supply demand dynamics in that state.
And how do you see that kind of evolving over the course of 2021.
Now, we see or experienced in Pennsylvania, really serving us extremely well in new Jersey. There is still a huge demand supply imbalance as as Youre, probably on a very aware of where there was about the more demand than supply as that program continues to ramp up.
We're fully expecting to see that continue for the foreseeable future and again. It is one of the reasons that we're so focused on on delivering high quality products.
And in a whole bunch of different formats of the patient.
Sure it through our New Jersey facility and and one of the reasons. We are again looking to continue to choke span to be able to meet.
As well as we can at the the continued and growing demand.
And in New Jersey, as well as of course, Maryland, and then execute.
On the Pennsylvania and Maryland.
Okay.
Okay.
Thank you next question comes from Clark of Murphy at.
<unk> Hallum Capital Group. Please go ahead.
Hey, guys. This is Clarke Murphy on for Eric The Laurier first wanted to just extend my congratulations on another great quarter, and a great guidance really impressive results.
Kind of switching of my questions.
Yeah, no problem moving over to California.
We've noticed that the obviously the illicit market is still really strong a lot of retailers of have been continuously hit by Covid.
Just kind of trying to understand any trends that you guys have seen in the stores is as we exit the locked down here both on like the store operational side and kind of how consumer behavior is the is evolving.
Jason do you want me to take that yeah, yeah, Okay that would be great.
Okay.
Hi, Clark so.
I think it's no surprise that debt back earlier in 2020 Covid.
Well it impacted the various areas, but for us for our business it impacted our stores and in California in the San Francisco area.
And once once we kind of found a new level of sales at the they've remained relatively stable at that level.
And so if if we were to compare.
Kind of quarter by quarter in 2020, even into this year, it's been at a similar sales have been out of similar level.
And and slowly here as as things are unfolding across the country and the restrictions are becoming unlocked where we're seeing some <unk>.
Gradual improvements in particular in our in our two new stores and in Berkeley, and Capitola certainly not to the levels that we expect longer term. Once for example college students are back on campus in Berkeley, and so forth.
But we we we remain very.
We remain cautious, but we plan that debt over time this year.
And of the summer and into the back half of the year, we will see improvements.
Across the stores there.
Yeah got it.
Oh, I'm, sorry, yeah, sorry of the only thing I would add to that is.
It's sort of.
We absorbed.
The weakness over the last of the over the last year or so and in California.
And I think that in terms of our profitability.
Last year.
The testaments to our.
You know too.
The fact that we acted quickly and we're able to control cost in California, but also the fact that our east coast operations, where we're so strong that they were able to.
More than make up for for any of that slack in California.
But going forward I mean, the I was just the thinking last night.
Watching on the news what's happening in Miami and you know all of these huge crowds and everybody sort of itching to to come back to the cities I think the it's sort of popped into my head about that that is the you know what we've made out of in store for us and.
And in San Francisco.
You know the fact is our three existing stores.
Were in downtown San Francisco, and a large percentage of our customers were either computers or tourists.
And most of most of them have not been in the city for for about a year.
But they will come back.
Hopefully, they're going to be a bit of it coming back in the coming months and you know that as of yet that's another area of potential upside because we have not really modeled.
<unk> resurgence in California.
But it's certainly within the realm of possibility that the that that could happen.
Got it that's a debt that's really helpful color.
And then kind of just switching over to your Capex plans for 2021.
Just any any color you guys could give there in terms of.
Capex is looking like and then what markets.
You guys will be putting that into I'm, assuming mostly new Jersey, Pennsylvania, Maryland, but any any color you could give there would be it would be helpful.
Sure.
Yes sure.
You're right Clark So it's really focused in those three markets and you heard us talking about expansion plans in each so.
So that that's where the capex will be spent in 2021.
Those investments will lay the groundwork for continued.
Strong growth, we expect in 2022.
And if I were to frame it for you I would say.
The more or less at similar levels to spending and in the full year 2020. So that's kind of to put you know kind of a frame around it so hopefully that helps.
Yes.
That's great color and then just.
Lastly for me.
Going back to kind of the the management transition here and kind of business continuity I'm just looking to see if you guys expect or if we should expect any involvement from for canopy or constellation in this process.
In terms of management I would say.
I would say no.
The they know what's the or.
Everything that's the that's been going on.
And they are the.
Continually.
Reaffirmed their support for us.
But the I.
Mike Lee from the from canopy isn't the isn't coming over any time soon to to work at the to work the type of stuff, but we of our where we have we are of great relationship with the companies.
We've talked to them.
Multiple times per week.
And I think that the relationship is the only.
The continue to grow overtime.
Thank you for or no further questions I will now turn the call back over for closing comments.
Okay. Thank you Keith did you of the closing comments or did you want me to close it up.
Nothing formal Jason go ahead go ahead.
Sure Yeah, Yeah. Thank you. Thank you everybody for being on the AR being on the call today, it's gratifying to see.
See the of the the numbers of people, joining and asking questions versus just the a year ago.
I think back to just about a year ago or less than a year ago, We actually had our first conference call of EVAR.
And I think the this business has.
Kind of a really long way from the from many different perspectives.
And the and the.
The in that time since then.
And we look forward to for sharing our progress are.
Going forward, you'll hear from us the you'll hear from us soon.
Yeah.
Ladies and gentlemen, this concludes the conference call for today, we thank you for participating and we ask that you. Please disconnect your lines.
Yes.