Q1 2021 Green Thumb Industries Inc Earnings Call
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Hi, Ken.
Right.
Good day, and thank you for standing by welcome to the Green thumb industries first quarter 2021 earnings call at the time are all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask the question Gerry.
The session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star Zero I would now like you had the conference over to MS. Jennifer Dooley Chief Strategy Officer. Please go ahead.
Thank you good afternoon, and welcome to Green Dot on the first quarter 2021 earnings call I'm here today, with the founder and Chief Executive Officer of Bank of <unk>, and Chief Financial Officer, Anthony George on it.
Today's discussion and responses to questions may include forward looking statements.
Are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements.
These risks and uncertainties are detailed in the company's reported by companies report filed with the United States Securities and Exchange Commission and Canadian Securities regulators, including our quarterly report on form 10-Q, which we expect will be filed tomorrow. That's reported along with today's earnings press release can be found under the investors section of our website.
The Green thumb assumes no obligation to update or revise any forward looking statements to reflect events or circumstances that may arise. After the date of this call throughout the discussion green Dot will refer to non-GAAP financial measures, including EBITDA and adjusted operating EBITDA, a reconciliation of non-GAAP financial measure to the direct.
For the comparable GAAP measures is included on our earnings press release and S. E. T. H E. R of filing. Please note all financial information is provided in the U S dollars unless otherwise indicated thanks, everyone and now here.
Thanks, Jennifer.
Afternoon, everyone and thank you for joining our first quarter 2021 earnings call.
Since we went together of less than two months ago I will keep my remarks relatively brief and relevant to what we see ahead in 2021.
Strong momentum in our business continued into the first quarter of this fiscal year.
Following a solid fourth quarter in 2020, our first quarter revenue grew almost 10% quarter over quarter for more than $194 million.
For a 90% increase year over year.
We posted our third consecutive quarter of positive GAAP net income of $10 million.
Adjusted operating EBITDA of $71 million and.
And free cash flow from operations of $40 million.
We are pleased with the quarter, but we know we are building something for the long term.
Todays cash balance is over $300 million.
As a result of our successful debt raise which followed the first quarter's equity rates.
This puts on balance sheet in excellent position to play offense.
We're off to a very strong start in 2021, and we're even more excited about the opportunity ahead for the balance of the year.
We have set of many times, but it is worth repeating.
We believe Canada the next.
Great American growth story.
Maybe of the classic American teams over the last 250 years exist in the story of cannabis in America in this century.
We believe things are changing of America, and Green thumb is well situated to take advantage of that change for our stakeholders abreast.
The rest assured as large owners of the business ourselves we are aligned with shareholders.
As we look at a map of the U S. We see a lot of opportunity.
The top of everyone's mind is the physician in New York, and how we will leverage the adult use of opportunity.
On a full circle moment for the industry Green thumb is turning the all of the.
Federal prison once incarcerated people for Canada into our New York cannabis facilities.
We see this as a self contained economic stimulus package fueled the type of demand for candidates.
When completed it will create hundreds of jobs <unk>.
Generally a lot of tax revenue.
Enable wellbeing.
And continue to remove people's assumptions on candidates.
In New Jersey, we are expanding production capacity, we have to open stores of parameters for Patterson and the <unk>.
Third store opening in the coming months.
This is in addition to the potential along the East Coast and places like Pennsylvania, Connecticut, Rhode Island, Maryland, Massachusetts, the name them.
Tourism is coming back for the VAT as Americans crave experience and connection.
Our cookies on the strip Grand opening this Friday is well positioned and nicely timed.
At the end of this week, we'll be on the Las Vegas strip with burner and the cookies team to celebrate we anticipate a lot of excitement with this flagship opening.
Looking again at the map.
All of the good common sense in 2020 to say candidates is essential for us still.
A large part of the country that does not have access.
But this is changing.
And the April Virginia became the sixth States pass of adult use and just over a week ago Green thumb announced the acquisition of Dharma Pharmaceuticals.
Don will operate the cultivation facility, one dispensary and it was a first mover in the Virginia market.
Following the close of this license gives us the ability to open five additional stores.
We are bullish on candidates demand in the South east.
Our track record of Illinois serves as a roadmap for how to capture the opportunity ahead.
Our business strategy has not changed.
We ended the highly desirable markets with large potential and then open up the scale through methodical execution and a focus on the consumer.
For the right time, the right price and with the right products.
That means built on retail stores cultivation and production capacity.
At the pace to support the market.
The careful planning and capital.
Most importantly, we listen to what our consumers want.
Our core objective has always been to be a leader in cannabis products, the create real relationships and real experiences with the consumer.
We believe it is fundamental to our long term success.
It has always been about quality over quantity for us and this has never been more important than it is today.
We are seeking high quality at scale delivering the best safest.
And most exciting products to people.
We are pleased with the momentum in the P&L on the revenue contribution from retail and CPG production, which we expect will continue to accelerate.
The beauty of creating high quality honest trusted products is several fold first great brands and products drive people the stores, whether it's our dispensaries or others revenue.
Brian of Scout flies off the shelves and dog walkers are sought after by name.
Second there are so many ways the continued to grow our portfolio through form factor flavor and experience it.
So for example is our introduction of smoothed buried under the Incredibles brand, which was specifically developed to help consumers looking for a better night sleep.
We have a robust innovation pipeline across the portfolio and our team is always looking for ways to delight, the consumer with new ways to meet their specific wellbeing or sort of creative partnerships.
Last quarter, we announced our partnership with can cash.
All of what is number one cannabis beverage we are excited to expand our beverage offering of will begin to rollout can the across our markets.
The loss of Canada, Illinois ahead of for 22 on awesome reception by consumers seeking an alternative the alcohol beverages.
We are pleased with the consumer momentum and believe this is a glimpse into the future.
For those of you 'twenty one on over in the Illinois, given the try you can't do it.
We have a lot of growth in the portfolio of by leveraging our current assets based on market conditions M&A can be an attractive option.
I'm not talking about acquiring trophy assets, but rather opportunities for geographic reach our brand portfolio or our infrastructure.
At the end of the day Green thumb as an execution driven consumer focused results oriented team and.
And that high standard total guardrails around all of our decisions.
As I've said many times before everything is on the table if it makes sense for our stakeholders and while we're on a fortunate of positioned to have a strong balance sheet. You also know that every dollar we invest must have the potential to deliver strong returns for you our shareholders.
With that I'll turn the call over to Anthony for his financial review and always engaging commentary Anthony.
Sure, Thanks, Ben and Hello, everyone.
From to what is now our 12 earnings calls of public company.
It's been just highlighted our team delivered record first quarter financial results generating $194 million of topline revenue and over 71 million of adjusted operating EBITDA yet.
Total net revenue for 10% quarter over quarter with growth CPG and retail revenue growth growing by 8%.
As a reminder, the difference between gross and net of intercompany revenue.
The key drivers for our continued strong revenue performance.
First strong and growing demand for candidates.
Well, we are seeing an upward trend in Canada the consumption across the country. There is no doubt that this is particularly true in the markets in which we operate.
The strategic bets, we placed several years ago appear to be paying dividends.
Second our CPG product portfolio.
We are cultivating flower in producing products that people are choosing to buy with the heart of dollars.
Our efforts on facility design, the focus is on quality over quantity as well as our product strategy the leads with the consumer.
Starting to establish true differentiation of the market.
Third execution.
This boils down to a few simple concepts, we live by here at Green Zone.
Number one do what you say you're going to do.
This holds true on our daily lives, whether that's consulting with patients consumers, we're making an internal commitment to the other teammates.
Let's go to the simple ramp, particularly at the start.
This business of industry of enough complexity already.
Third embraced the team we have.
<unk> said it before but our team is our greatest asset we of passion for knowledge and the competitive spirit that run through all of us.
Said differently.
We'd like to win.
That's the financial speak in addition, the strong topline performance. The company continues to post robust gross margin with Q1 coming in at 57%.
I know folks are probably tired of hearing me say that our intrinsic goal is to keep this metrics at or above 50% over the long term.
On the SG&A side, excluding D&A and stock based on normalized operating cost totaled 42 billion of.
The $4 million increase of $38 million, we posted last quarter.
A key goal of ours for this year was the build the company's infrastructure. So I would anticipate our growth SG&A spend to continue to increase for the coming quarters.
Total other expense in Q1, approximated 9 million largely driven by non cash charges.
Interest of the warrant expense associated with our senior debt.
As a result of the company generated over 71 billion of adjusted operating EBITDA close to 37% of revenue.
In addition, we generated over 10 billion of net income.
The third consecutive quarter of positive EPS.
On the capital front, we continue to manage our balance sheet the way that maximizes the operational flexibility.
For your basketball from this out there which are version of the triple threat.
The sizable cash balance the positive cash flow from operations and the ability to buy.
Well, sometimes our favorite movie.
No.
Net of the 156 million of equity raised in February we ended the quarter with over $275 million of cash.
As you work your way down on our balance sheet you see the bottling.
Low relative accounts receivable of proof.
Inventory balance and the pay.
The number of sub $10 million for the first time in 2019.
The new technical accounting for those puts our current ratio of business.
Subsequent to quarter end of the company completed the 217 million self conducted debt raise adding over 100 billion of net cash to our balance sheet.
Leaving the interest rate.
The bank of gross of the cohort continues to create substantial value for shareholders.
Zero percent non res.
Fantastic.
On the pro forma basis, the company has in excess of $301 of cash.
Couldn't be more excited to put these dollars to work as we aggressively invest in our markets and significant regulatory change.
And while we are proud of our first quarter results.
The focus on the future.
If we tell each of our new hires were still on the very early innings of this industry.
So buckle up hang on tight and remove all the assumptions.
In the meantime for all of our stakeholders, we will continue to run our DAP and map.
The key to our growth plan into a tidal wave of demand for U S. Kansas.
Thank you you bet.
Yeah.
Thank you Anthony.
We are off to a great start and excited about 2021.
We spent the last few years building, a strong foundation brick by brick and our position today is stronger than ever.
As the Green wave continues to sweep the country. There is more optimism around the state and federal legislation.
It is still day, one at Green thumb. So we will keep taking a hard and fresh look at every opportunity to strengthen our business and to find innovative and new ways to delight our customers on their journey to <unk>.
Being true candidates.
We are very privileged to participate in this industry.
It was one of the fastest growing industries of America today and has the ability to drive meaningful social impact.
We are firmly committed to.
We continue to dominate the first day profits to every community, where we opened a new store.
We have expanded our dog walkers donation program to include the Bally legacy bonds to support animal rescue organizations.
In our home state of Illinois, we have been advocating to get Illinois, Social equity program started and look forward to the potential lotteries for new dispensary licenses soon the.
The delay of the licensing process has created substantial financial burdens for social equity candidates, many of whom have been hardest hit by the pandemic.
The way this process is beginning to move forward in Illinois.
And in New York, We believe New York can lead in this respect by starting to adult use on January one 2000, 22023, not only with the incumbent operators, but also by issuing new licenses in a timely manner to new licensees, who are part of the law.
The heavily weighted towards social equity entrepreneurs.
Finally, we are committed to outstanding corporate governance and are especially pleased to welcome swap the Alibaba group to our board of directors.
The use of trustees of the roads Trust World renowned educational charity that support the exceptional students the study that Oxford University.
She is also a board member for both God of war that aims to increase voter turnout and strength in American democracy.
We are clearly aligned on our core principles.
In closing your company is stronger than ever and committed to becoming better every day.
With that we welcome your questions.
At this time, if you would like to ask the question simply press Star one on your telephone keypad again to ask the question simply press Star one on your telephone keypad.
Yeah.
And in the interest of the time, you would like to remind participants to limit the questions to one question and one follow up question.
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Yes, Hello presenters I'm here.
Your first question comes from the line of the again either your line is now open. Please go ahead.
Thank you good afternoon.
My first question Anthony is for you, it's a little bit more of a housekeeping item. Thank you very much for the commentary around on your expectations for continued growth in SG&A is is you invest behind the business can you. Please clarify whether you were talking about SG&A in absolute dollars or as a percentage of sales.
Great question.
Hey, there thanks.
Thanks for listening.
I was referring to growth gross spend of $1 nine percentage.
Yes, we will see how much we can grow the topline, but the anticipated over time kind of maintain the nice operating leverage within the guidance, but I think the growth SG&A dollar side.
The increase over the coming quarters.
Understood. That's very clear. Thank you for that and then my follow up question. Then is for you and for little bit more of a strategic one clearly on the flower side of your business Brownie Scout has been a homerun <unk> been hearing about that for.
For a number of quarters now I recognize that the U S business and the way you guys run your business is very very different than Canada, but one of the kind of unfortunate learnings out of the Canadian marketplace is that the consumer preferences in terms of flower strains can today, so and pretty quickly or at least it seems like it.
Caught some of the Canadian operators off guard.
I'm just curious how do you guys keep your finger on the pulse in terms of strained preference and then if you could offer any kind of.
The sense of the the percentage of your overall flower sales that Brian is now accounts for all of that would be helpful. Thank you.
Sure, Yes, great question, and insightful and Youre right.
Tastes evolve strains evolve and things like that so we're very heavily invested in.
Breathing evolving the strength portfolio on delivery for consumers essentially the best strength around.
So while we don't talk about a lot of the other strength out there whether it's the Sioux city the portfolio Jack on the Orange of sour diesel, which right now on to a grade for the White Durbin that we recently released for the East Coast.
There's a lot of great things in the portfolio, we just like to talk about one since it does so well because of the.
The percentage of revenue is not huge.
Not a significant piece.
I, even know it offhand certainly want more consumers want more certainly the effect for the medical patient it for the the relax effect of being because of the delivers as one of the cut that's why it stands out but we're not betting the company almost any single strain.
Nice to the Canadians the carpet to realize the but the California, because it's all just after the last couple of decades strength matter.
Headaches matter. This is the very important nuance in the space.
Okay, great. It's great today, youre not materially over index to that one strength. Thank you very much.
Sure. Thank you.
Thank you. Your next question comes from the line of Matt Mcginley.
Line is now open.
Thank you.
On the CPG business it looks like the gross value of product you sold in wholesale increased nicely sequentially, but the amount you sold internally decreased modestly I would hope that you sell the product in your stores that the customer wants and not necessarily what you produce but is there a geographic factor or something with product mix of it.
Cause that sort of mix shift or a slight decline in the and product that youre selling internally.
Hey, Matt entity here.
Yes.
It was relatively flat actually kind of thought.
Quarter over quarter.
But given kind of the draws once you on pad that theres of what's going on within each of the state markets of the operator.
It's really not a number that.
Kind of the targeted for managed towards.
It's one of the new naturally falls within the business.
So while we didn't kind of senior company kind of revenue grow at the same click on behalf of historically, we're not we don't read too much into it just based off of what we're seeing within the same store sales.
Okay.
On the capital raising cash balances between the equity raise and the debt you brought in over 250 million at year to date in the proven you've been able to generate cash and I would expect that that would own the improved but even as you spend more on capex and if you did a lot more M&A almost all of the deals we've seen this year, including the Virginia deal yours.
It's very heavily weighted to equity consideration so the.
Question on that is how much cash you need to run this business in every area of reaching the point with the company of the industry, where you just sit on bigger and bigger balances because you don't know where you may need to pivot next kind of like a tech company or are they just sit on these big balances and net net when they when they may deploy them at the half.
These larger balances so just holistically on thinking like what's the what's the right amount of cash that you need to run this business and drive.
Sure. Thanks, Matt This is Ben.
Yes, it's kind of the exact science from sleep really well with the fortress like balance sheet and candidates being federally illegal with the lowest cost of capital even against others on federally legal domiciled locations.
And we think the opportunity is the Mets. So we're seeing annualized numbers costing 20 billion, we see the number going way over 80 billion and it would make a lot of sense for half the capital on the balance sheet on investing aggressively into the business I mean look across the state opportunities, Illinois, Ohio, Pennsylvania, Maryland, and New Jersey, New York, Connecticut, It keeps the.
All in on.
All of them have significant growth based on the size of the market even if you.
Take care of conservative assumption and cut it by 2030% so.
So we're not really managing the business for the amount of capital.
The cash equity split I don't want to own our stock.
We're we're flattered by that we're happy with that we don't want to give it away obviously is the <unk>.
Treasurer here.
But we're comfortable with it on the share count we've got we're managing that carefully and we believe we can create very significant accretive value on whichever part of the income statement do you want to measure and put on multiple on through the M&A.
Otherwise, we wouldn't do it we would you would double or triple that of the business, which we're doing as well.
So we like the cash balance of don't know where the capital markets are going sure. One day of listing of safe and other things are going to happen and it will change, but the business is pretty fantastic currently and we want to continue to invest in that and.
I haven't thought for a moment that we have too much cash given the current situation.
Okay. Thank you very much.
No problem. Thank you.
Yes.
Thank you moving on your next question comes from the line of Eric The Laurier from Craig Common your line is now open.
Congrats on another.
Another impressive quarter here.
So bit of a follow up to Matt's question here.
He has done a great job lowering cost of capital through these non brokered institutional capital raises.
Yet at the same time.
Good day.
Cannabis stocks in general continue to be negatively impacted.
By the significant capital and trading restrictions. So I was wondering if you could provide some color on the type of institutional demand that you're seeing beyond the the public markets here and.
Whether you're seeing any broad changes in our compliance risk appetite.
The weather institutions are shying away are warming up to the idea of taking on a U S cannabis exposure.
Yes, I'll take that and that's of great insightful question, because that's really part of the core issue here.
I would say for postpaid of putting the name of the press releases there is more attention the things are not simple.
However, what you've seen dreamed of do literally at every single res is bringing new capital of at the space.
And that and you know us and the others do too we're literally bringing the capital of each one of these rates is not out of other cannabis companies, but new high quality long term aligned with management institutional capital.
That's where the supply is going.
And we're bringing on it but it's a slow for movement there needs to be more clarity things are very grey, whether its custody prime broker to different relationships still can't buy the stock on robinhood CNBC still doesn't cover it properly or talk about it.
The very tricky situation I think it continues to be the pms on the investment analysts are.
Unbelievably excited it cannot.
As we see it are sort of surprised by the weather we call on structural irregularity or market inefficiency that seems to be sort of in slow motion.
At the time when the business on the ground bottom up as an accelerated fast motion and in fact accelerating I mean, New York you had returned the Mexico, Theres more and more happening and now you've got Georgia, but hopefully the nature of these licenses in Virginia, just legalized, maybe Mississippi and Theres talk of other places.
So we see an absolute dichotomy between the capital market inefficiency slowdown and the on the ground acceleration. So that's why we want the business with tons of cash very very aligned shareholders and we're bringing on new capital I can't speak to the other companies of the other countries or whatever else is happening is people are doing it differently not everybody thought of one size fits all.
We're building a business for the long term for shareholders investing capital into the market opportunity in the U S that we think is somewhat unprecedented.
We're fired up about it and we're aligned with the shareholders.
We're not having a hard time, bringing in the right kind of capital.
Feel very sort of privilege of on the spot we're in but I think broadly the capital markets are in their nascent nascent stage.
Okay, great that's the.
That's helpful. All right great color, there and then as a bit of a follow up with that cash balance being the largest and span and how are you guys continuing to increase your cash flow generation.
Could you just provide some inside of some color on sort of how you guys.
Decide whether to sort of increase the scale of your projects or sort of spread that that cash around and start to take on new projects new geographies, maybe some smaller scale projects can you sort of help us understand how you guys think about that trade off there. Thanks.
Yeah, we think about it like I.
I mean this is the ultimate gain right the capital allocation and how we put capital and where we put it into what kinds of returns for what the business is going to be win on what the board of look like.
It really is kind of a multi dimensional situation with lots of different states and markets and things. So we look at our cards for.
We can see everybody else's cards, and we make the bet based on the most basic principles possible I can't remember the just call or the other one we talked about towards the formula of the Kelly principles on how you make part of our beds and the way we think of our wagers on behalf of shareholders. If the distance our money and the chips on we're planning of the table, where we're trying to take one plus one to make for we're putting in.
100 to create 500 and the <unk>.
Well math of.
They make it up say $100 million of investment to create 50 or 75 million of EBITDA.
Multiple you think the market is going to trade the EBITDA of 20 make it up the 1 billion $5 of of market value creation.
Where can we put that 100 to work well guess what there's many many places we can put it to work because of tens of millions of debt over 100 million Americans, who are really really interested and want to have demand for the product.
It's about the simple to setup as possible. So we're just wanted to play where we have the highest probability of success.
Based on the.
The chips that are out there.
Yeah.
Okay.
Yes, alright. Thank you moving on your next question comes from Camilo Lyon from BT I G. Your line is now open.
Thank you very nice quarter guys congrats.
Particularly in light of how difficult February so I'm curious snow after putting up the call. It a 10% sequential growth in Q1.
What was the exit rate.
Coming out of the quarter relative to that 10%.
Any color on the EBIT share as to the momentum that you've seen thus far into Q2 would be very helpful.
Yes, it's a great question, what type of what I would say when we sat here, where literally the same seat and I think it was March 17th Wednesday, St. Patrick's day to day of the stimulus checks came out because of that.
Business credit from others, you've seen it in the data thanks.
Things changed in the back half of March.
So the market woke up so.
I wouldn't say that an elevated above the sort of caught up to February being well take the Illinois market data you know 80 880 in the back popping up of above.
You can see it state by state and we really track the state data to show it.
So I think your run rate exit is more of a first quarter flat situation.
For us to some kind of dramatic acceleration.
For 'twenty Tonight holiday and everything but under the covers EBIT margin is a little stronger than April.
Green thumb specific but look at the markets just restate gives you the data and you can see that.
I've got a few things, which stores are opening of whats happening so no material change really on price and on.
For Greenfields purposes.
Still coming out of the back half of the year, we talked about that towards the end of the year, particularly Illinois, some things come in at the beginning of 2022.
Thank you for that and that actually leads on my second question about it.
Got you back half expansion plans.
If you could just remind us what projects are coming on on coming online in the second half are in the states that'd be very helpful and.
And how we should think about.
The really robust margin that you delivered in this quarter understanding what you said Anthony about.
You know maintaining of the kind of like debt 50, plus sort of baseline, but it really seems to be it seems to be that as more of cultivation and harvesting comes on line, particularly in the back half you have the ability to at least maintain the starting point of the 57% margin rate through.
Two of the balance of the year, if I'm thinking about that incorrectly please.
Correct me, where all of them.
And I think Thats right.
On the ground what I'll say is like anthem has mentioned, we're kind of on target.
Targeted at 57 on how do we get the 59, where we had the trail instead, we feel like we're comfortable with where the gross margin is instead of more like 50.
And we're okay investing into the business to.
The scale. This thing we think theres a lot more production Tommy.
Simply because there's a lot more demand and there's a lot more demand people are on a lot more of our products, where how the thinking about it in that way. So we're very comfortable making investments into the business. The it means the margin goes down.
So it's not a core focus of trying to build the infrastructure that really hits. The SG&A line more was the revenue is accelerating and the gross margin scales on amazing thing and also you start to work on yields when you start to see real details on you know, sometimes we all talk about the exact details inside of the business and that's not a coincidence because we're really working on that.
<unk>.
We believe we have of National model, we believe we can bring premium indoor flower of the consumers across the country who want it.
Basic as possible and there is more upside the go to the next quarter I don't know, but in 2023 of 2020 for where this business is on the scale. We have based on the capital we're putting in and based on the demand we see and just make it up the New York, and Virginia, and New Jersey and that the biggest Candida alone I think there's maybe only 30% of 25 licenses.
They're currently.
And it's only the first mover and then we think there's got to be a lot more people in the industry and its got the access to capital and hopefully LTC gets around.
A few things but.
It sets us up pretty well.
Thanks, very much good luck.
The question of things.
Thank you. Your next question comes from the line of Michael Lavery from Piper Sandler. Your line is now open.
Okay.
Thank you good afternoon.
Hey, Michael.
Just wanted to follow up a little bit of the industry certainly is.
Accelerating point with so much the legalization momentum in your balance sheet obviously.
So as you up really well can you just give us a sense of how youre thinking about capex and any ability to quantify what to think about for for this year and maybe a range for for something for 2022.
Hey, Michael Anthony here I'll take it.
So in 2020 kind of the gross spend some of what it is which is kind of before the before on the sale leaseback of reimbursement.
We spent about 113 billion last year.
Q1, our growth spend.
The 32 billion.
So I would anticipate our gross capex spend this year it certainly.
Greater than it was last year.
As you know we're not we're not the green light is talking specifics, but.
With the balance sheet debt.
And the markets that we have in the and the regulatory change that's coming we're going to lean in pretty aggressively as I said my remarks.
I would anticipate that in Q2 from Q4 the.
On the Capex should accelerate from that 32 number.
Okay. That's helpful.
The related.
Follow up can you.
Touch on obviously you <unk>.
<unk> got the debt at 7%, which is the debt by far of the best cost of capital among any of you know in the industry, but.
Can you just give a sense of of.
You know is that it is there is still improvement from there or is this kind of where you expect to stay.
What would it take for that too.
To move the needle again, how do we just think about you know what what settles into the sort of a you know maybe baseline type of run rate.
Yeah.
Yeah I mean.
For our purposes.
That's not the thing you can just play around with based on the day of where the pricing is for US is more alignment with the debt providers are.
Where we think that cost of capital of look was on your end I talked about 6% the 7%.
If we could get 5% the we're not really like look at the refi quickly the.
The way of the structures for us on our balance sheet is three years me of an option for a fourth year. We think the next time, we revise when we're exposed to the sort of on normalized capital markets. We've been told the business performance.
The P&L books of investment grade and if you look at U S investment grade yourself for 3%.
If you look at the debt characteristics of the business of trailing 12 months of like one times EBITDA plus or minus.
And even if you say the taxes or walkie balance two types.
Our team under Levered for the growth we see.
So we sort of really well with it and we like where we are.
Certainly more interest we can flex it up to $2 50, I don't need to pay the interest on more cash sitting on the balance sheet just doesn't make a lot of sense of another year of fill out the rest of it would be out of the opportunities.
Think of hopeful for the everybody else in the industry to be able to continue to drive down the cost of capital also.
That should happen, but it's on the capital markets are thin as we've all seen so we like our position.
On me for Us to go get the equity the debt and how we're going to work through the same thing in 2019 people were a little surprised that happened in 2020, and we plan to be back on 2023 talking about where the world is with canvas.
That's really the excuse me that's really helpful color. Thanks, so much.
Sure.
Thank you. Your next question comes from the line of Aaron Grey from Alliance Global Partners. Your line is now open.
Hi, good evening, congrats on the quarter thanks for the questions.
So first hey, how's it going so first question for me is a little bit around M&A.
M&A great.
Great to see the acquisition in on for.
Junior with adult use coming on line there in the next couple of years and flower, starting but would love to get your perspective in terms of you know how you think about you know potential additional.
M&A, particularly through the lens of the chance of there being some changes to the federal level or your thoughts on that you know there's been some some peers or others out there who have started to make some moves in anticipation of there might be in the change at the federal level and how you guys think about that you know on the near term on your acquisitions. Thanks.
Sure.
I can take the.
So M&A look I mean, the high level of thesis is everything's on the table. If it makes sense, we said that for a while.
The aggressive and knowing what's going on in the space were very U S focused.
We think the actions here in the United States with the emphasis of American story, and we think that as the U S execute the as an industry of the country. The world will work what we have.
Capital markets.
Scott amount of pretty efficient here, so we're comfortable with that.
Look at our history of the raised debt and invested in the business. We're looking at on what's happening on the cycle of capital markets for some part of our candidates of the hyper speed. So we've got feast-or-famine ups and downs.
We're comfortable with that I would say that you should look for us to do M&A, that's accretive to shareholders based on the exact pieces, we've talked about so whether it's going to be enter like the virginia or of scale like whatever the last year, we bought a store in Connecticut, just scale of the business.
In other strategic plays like that.
We've been active for five six years, sometimes like Anthony said, we do our favorite which is do nothing and sometimes we do a lot.
We think we're following what's going on in the U S Canada pretty carefully.
We understand what's going on on the ground and therefore.
It gives us a little bit of of edge with the information I wish to make decisions of whether that data driven or personality, driven or legislatively driven whatever.
That's the recipe by which we use last on your point.
That's all part of the board that we see about how to better where it's growing the business is very good under the current situation so not likely to put a lot of capital of as somebody that might happen later.
Like where it is right now we think theres opportunity with the change not threat and we're excited about that we want to play a lot of offense, but at the moment.
Do you feel of tens of millions of Americans want candidates that don't have it so we need to make it really fast really good and that's what we're up to.
Great. Thanks, that's super helpful color.
And then second question for me so.
So just given the strength and balance sheet you know on it we've talked about Florida. You know of couple of times you know more recently I'm sure. There's been some action there in terms of the acquisitions this year.
Has it been of ton allocated down there for you guys, where you had some other high priority states, but just given your strength in balance sheet.
You've often talked about you like the market you know longer term so does that kind of give you some.
Capital to maybe put towards that market and look to grow there, especially with the potential of adult use of being on on the balance in 2022.
Yeah, I think thats insightful.
Yeah, as we had more cash are exactly right. We looked at it through that lens and that would lead you to think that conclusion, yet or we're not going on just sit with a lot of cash for a long period of time see 20 million Americans, who have of high interest.
Nice market people who've done a very good job down there.
So it's an interesting market and we are.
Studying.
Alright, great. Thanks, I'll jump back in the queue.
Sure.
Thank you. Your next question comes from the line of Tableau Joanne <unk> from Cantor Fitzgerald. Your line is now open.
Then can I ask you about I understand this is the growing industry and you'll have a lot of levers, but the 2% same store sales growth sequentially can you help give us some context around the number I mean, I could interpret the Pennsylvania, maybe too many stores I know you've done the market is growing kind of go right eventually but for.
The other states, Illinois, New stores will open on the recently I'm surprised about the 2% same store sales number can you give some context context around the place of things.
Sure.
I can start.
Yeah, we looked at we don't see any issues in the in the business. There hasnt been any major new turn on sort of things like that with whether its adult use for new store openings of conversions that sometimes give tailwind there.
The other thing I would do is look at state overstate whats happened the fourth quarter to first quarter of first quarter over fourth quarter by state wheelchairs, I was giving up a lot of market share.
The the ebbs and flows of the market first quarter was pretty slow until March 17th.
No doubt about it February was pretty rough in the country. There was four days of snow and I think like Ohio, Pennsylvania, and New Jersey had multiple feet of snow and nobody wanted to go out in the store.
It was open every day and it's the 28 day month.
So I don't see any real read through their March came strong.
But.
It is 2% on 48 stores. The other big thing is its the big base. So the numbers do not have the comp base over a year of 40 on a sequential of 48.
Moving the needle of 48 stores 30 per cent across 10 states as tough.
The business is much bigger than it was before in terms of the amount of retail business. We're doing on a daily monthly quarterly basis. I mean is there a big barge big market share yet the market is going to quadruple in front of all of us.
Alright. Thank you and then just to follow up on New York, How are you thinking of what the potential there to open you know to have the eight medical stores you know the view on the timing on your views in terms of our win just taken steps the stop selling flowers. If you give us some insights on the thank you on the medical side.
Sure I can take that also has been.
But we think New York is it also market.
We think the structure of the market sets up well and that was about execution. We've seen of good tax law stumble on execution, Illinois, yet still have the chance to the tumor successful we.
We believe to just put the dart out there that one 123 January one 2023 would be a day at the New York opening of adult use and they can do such where it is not the current incumbents of which GTI as one of them.
Only no grandfathering and then instead of based on the timeline of the based on the laws of the read it in the commission on all the things that New York is doing it and they're pretty focused on doing a nice job there.
You could get the licenses and applications and those licenses would have a focus on social equity and day. One you could have new people enter the industry, new entrepreneurs with the chance to generate new wealth.
That's a big part of it there's no real product rules yet.
It was of the market the law because he said, yes. The flower we've heard others, who are really carrying the load on we're appreciative of that pushing this forward because obviously the medical patients should have access the flower for wellbeing, it's commonsense yet rules for tasks regulators where needed the space. There's a lot of education and hard work that has to go on to bring that about.
But anyway, you slice of the New York can be of great market to be plenty of demand.
We'll go for our eight stores three of which can be dual.
The extra you didn't do it.
Okay. Thank you.
Sure.
The same.
Thank you. Your next question comes from the line of Graeme Kreindler from from eight capital. Your line is now open.
Hi, good afternoon, and thank you very much for taking my question I wanted to follow up on some of the earlier comments you made bandwidth respective of the potential set up that in the event. The market has the Interstate commerce element to it the.
Early days of the GTI story really talked about on.
The distribution at scale.
And I'm wondering if you could elaborate a little bit more but you know theres been significant adds and diversification across the brand portfolio of GTI.
Over the over the last little while but when you talk about the the distribution at scale how does the your potential war chest for your existing asset base factor into a situation, where you were looking at distribution coast to coast.
The existing cultivation coming on line.
That's very much serve to expand on the existing state markets on the demand coming on there, but do you see opportunities to leverage any of that infrastructure from a regional basis or would this really requires some large greenfield type of investment or potentially using more third parties on the supply chain. Thank you very much.
Sure Hey, Graeme yet I mean, it's the same story.
Lucid is theres huge demand within the markets and like we talked about the last call.
We said on this call business is very good under the current situation, we think theres an opportunity more than a threat with interstate certainly of need more of it.
You got to think about the supply chain.
Becoming more fragmented and there's more opportunities there we think our brands win with the consumers exactly what the supply chain looks like today as you know.
Not something that we lose a lot of sleep over we know what the products are of a lot of other make them at scale for making them at scale in markets that have.
12 to 13 million people 20 million people.
40 million people, who are out in California. So those are huge markets and obviously the reach analogy of there's other things, but there's other models of the consumer products that are have built the sorts of things. So we don't think we're behind in any way shape or form we feel like we're in a pretty good spot on and like where we are I think it was also really crucial is the <unk>.
Distancing of the product.
You can't just make it everywhere it ship it and then he was like did the go especially as you get closer to the flowers further away into the into the refined products you've done the isolate it's easier, but the consistent to the process is very important.
Understood and appreciate the insight. Thank you very much and then and then just as a quick follow up here with respect to the the acquisition of Dharma in Virginia and the.
There's been some chatter about the potential timing of of the start of adult use being brought forward as that relates to your capital allocation decisions and the capex expectations that were outlined earlier on the call.
How much of that might debt directly to Virginia, or how quickly could you could you start deploying capital based on what Dharma has built our potential plans that they have drawn up for for significant expansion. Thank you very much.
Sure. This is Ben but that's the Dolby Shai the.
What what's happening with the legislation like I've said many times in the legislation in the state or federal federal being more so because of trailing indicators. So we see $8 5 million people that have a huge amount of demand. So we're putting in the pieces in place to serve that demand.
The stand at the medical we understand it's going to work, there's a lot of nuances for how that works, but it really doesn't impact the capital decision.
Like a do not enter sign in the no chance for adult use we might change the plan.
But the plant is 8 million people billions of dollars plus market, what's the multi phased approach. We've done this in many states. We know the consumers you don't want the branded product and now we know how to make the mid scale and at scale without the need 5 million people.
<unk>.
We're also thinking what states are around how does this look in what happened to reach now moving to your question for Virginia is a great market the pleasure to see you know.
Canada is coming to an area of the country that really does not have it.
Because that's the big deal.
Got it understood. Thank you very much.
Sure.
Thank you. Your next question comes from the line of Andrew Parsons from Stifel. GMP. Your line is now open.
Okay.
Alright, Thanks for taking my questions on and congrats on on the good quarter guys.
Maybe if I can come.
Come back to the discussion of <unk>.
Of the dynamics in March on into Q2 could you talk a little bit about <unk>.
The pricing or promotional.
On the environment.
You know.
People receiving stimulus checks was highly anticipated.
And.
Wondering if.
If there was a higher than normal promotion.
To capture you know that that strong traffic.
After a tough January and February what does the April looked like on and now.
What those may look like after after the for 'twenty and on the stimulus check period.
Yes.
Okay.
And revenue here I'll take that so.
I think.
Trying to read into your question of what rate, you're essentially asking if we ran promotions in March too.
Combat the softness that we saw in the early part of the quarter.
So that's really not the case, we continue to just kind of run the business.
I'll remind you that one.
One of the one of the benefits of our business that we still operate the number of of supply constrained environment. So.
Even though the operators don't have a huge appetite to kind of.
Two of lot of promotional activity.
Some of the markets are getting more competitive, but that's that's just natural evolution.
And obviously, we're kind of studying that watch net that there is nothing there is nothing kind of that normal or anything that we did.
Well, we had a discussion on the table, saying, hey, we need to do something about debt. So we ran our we ran the business ran the playbook.
The other stimulus checks came in and people see exactly what the kind of burden, but the mentioned during the last call.
The purchase more product and I think.
We probably weren't the only beneficiary of that.
Yeah.
Okay.
Thanks for that and.
Maybe just talking about New York, a little bit more.
Regulations haven't haven't been out yet.
Within the law. It gives the regulator a lot of power to the place any kind of caps or restrictions.
And on yet.
You are you've already secured your your platform for production there.
I'm just curious if you could give us a little bit more color on your thoughts on you know how you think the regulations will play out.
You know, whether you think there would be any any production caps on and how your strategy.
With your production footprint that you've already acquired plays into that.
Okay.
Sure. This is Matt I can tell you.
We've talked about it.
I'm not sure how much the new news is we think theres going to be a tremendous amount of demand we want to build the high quality products. We know we can make we have.
An aggressive capital spend of class.
State has not issued the rules yet the committee.
We're pretty early on and go to the website. We think that's the strong side. There's a lot of the attempt to make this work and make it work well and we're here as a partner to help like I mentioned some of the current Roes of worked pretty hard on getting flower out and you know, we're all kind of in it together.
Along with the new entrants and so similar to what we did in Illinois for the week program, which is it application of assistance program its hard to apply for a license.
So as we can educate folks on coming into the space, we're going to make the product I have our stores, we hope others have stores like I am.
Mentioned, we're throwing the dart on one 123.
Based on the exact science of zero lobbying is just based on what we think we're set up well for the industry for everybody who's invested in this going really really well it was three or six months earlier of three six months later.
The work.
One of US are Tom what was the pretty lofty goal like bring other than day, one and we're going to aggressively build but we know how to make we think that that version 123 and for laid a lot of mistakes and hopefully we can not make the same mistakes in New York.
Thanks for that congrats again I'll get back in the queue.
Sure.
Thank you. Your next question comes from Scott Fortune. Your line is now open.
And I'll be brief real quick thoughts on California, then you open up the testing of stores I know it took a while but you are there any cause.
On kind of trends there of momentum and thoughts around building out of California at all.
Thanks, Scott Yeah, that's it on <unk> we.
We see a lot of the COVID-19 restrictions still going on in California, That's opening up stores off of nice start the momentum you up into the right as we say Oh, well continue to refine menu selection build loyalty in the state.
We're aggressively looking at what's going on in California, I think it would be foolish not to although we're not aggressively spending things will make sense of where they won't do any of the will go there, but the places that we mentioned.
For aggressive spend or like in the now.
So, California, we're watching we're studying we like our position, which is not of lot of capital at risk.
Got it and then two other states the.
Mike, Nevada, and Massachusetts as things open up here are you seeing.
Favorable trends from that standpoint, and then there are these two states that like the the can investment makes sense to move forward in two other states of thinking.
You'll you'll want to some other states going forward.
Yeah, I mean, we see little little difference between Nevada, Massachusetts, Massachusetts remain strong to get released.
Parents of the end of that market, we plan to scale production moving more of our profit there.
And we plan to expand retail non administrative we're sitting on with one so look for actually come in Massachusetts in Nevada, We see our business is not as heavily levered to tourism.
So it didn't soften the way it did and now you see the surge with 60 to 80 of them on the basis of lot of tourism, obviously that the heavy play of what we're doing with cookies of burner, but do you think is right. So.
So the plan to play that but both of the state that you'd be pretty good transparency on a monthly basis, we see them come back pricing firm in both states. There's a lot of momentum for our products and the others are as there's just good growth in both of those markets and we are of a couple of more stores. We can open in Nevada, we should have this year on in Reno and one more on the Vegas area.
Which are in the pipeline.
Great appreciate the color. Thanks.
Sure.
Thank you for your next question comes from the line of Andrew <unk> from excellent capital markets. Your line is now open.
Hi, good afternoon, everyone and congrats on another solid quarter.
Ben I think of couple of months ago. When you gave us your kind of priority list.
In terms of capital allocation and in certain markets, where were your AR with the prioritize capital spend.
Just given the developments in New York, and Virginia since that update could you kind of slot those in and kind of give us a sense of where those fits in terms of the priorities of deep in New York is kind of at the top of that list and.
Maybe a little bit more clarity on the Virginia.
Yeah, I mean, both of them come in strong tier one.
Capital allocation opportunities I mean, it's a pretty basic math problem 20 million people in the eight 5 billion people on what's the current market size, whereas the job you've seen the movie before.
The called Illinois, Pennsylvania, It's just literally it is not about anything that fancy, it's about how much profit consumer wants.
Major red flags in the legislation meeting some structural irregularity or like vertical for us for no product of potencies of something.
On the most of these markets have a pretty set structure for how they're gonna on rural.
New Jersey, right, there as well, but 9 million people of waiting on the rules of wait for listening to get Boeing huge amount of demand.
That's great and just the follow up I wanted to ask on the gross margin profile.
There's been a very nice trend the gross margins have been ticking up every quarter since Q1 of 2020.
Just wondering on on your thoughts on where we start to find the kind of normalized gross margin profile going forward.
Do you think we're kind of approaching that level yet.
Kind of in the Q1 period or do you continue to see late in the room for the.
Got to move higher.
As you scale your production of cultivation activities.
Yes look.
It's a great question, it's a really hard question to answer.
So you know part of the reason is because given the growth of the business.
What we have going on is we're obviously investing heavily on the CPG side of the business. So over time that should become a greater percentage of the overall business.
And when you unpack kind of the gross margin. The gross margin of retail is relatively static right. CPG is where you can get kind of real kind of gross margin leverage within the business. However.
These these sites take a while to kind of turn on and then get the scale and so what you have is if you unpack the portfolio. When you lay them out you have a number of facilities right now that are achieving scale or call. It operating at scale on continuing to refine and get more efficient and.
And then at the same and the same rest of you also have a number of facilities that are just not turning on that are not terribly inefficient right. So they're a bit of a drag I guess on that on that gross margin line. So I.
I think it's you know.
I think it's it's difficult for me to sit here and tell you where I think it's going on where I think kind of the the true kind of potential is in that line item.
What are the benefits of the business is that with with solid cash flow from operations in the healthy cash balance you don't have to sit here and manage the gross margin for a specific number we can make bets that we know will pay off the two to three years from now we've got the luxury of doing debt, where we have these other states that are operating at scale and so that puts us in a really nice position to put to the shareholders.
On a position.
So I think you'll continue to see us lean in on the CPG side of the business, where we know that over time, we can get what kind of gross margin leverage.
That's great color as the main appreciate that and congrats again.
Thanks.
Your next question comes from the line of Mike Hickey from Benchmark Company. Your line is now open.
Nice.
And Anthony Jennifer.
Andy Congrats on the quarter guys. Two quick ones from me just curious how you think about.
The investment or development of cannabis lifestyle of cannabis media assets of sort of the ancillary growth opportunity for you.
And then secondly, with your canned beverage product line launching in the Illinois.
Obviously, it sounds exciting, but just curious the doubleclick maybe on the learnings there in terms of manufacturing maybe initial demand from the category potential outside of California. Thanks, Scott.
Sure.
So taking the second one the first can we're excited about the launch.
Could you just see like everybody. The beverages are not a big part of the category we talked about of.
Off Prem versus on Prem, where all candidates the soft prime and we think thats changing slowly.
One of the of part of that.
Made some place for that.
We didn't launch went well we don't we don't have any major news to share except for the product is fantastic and for those of you haven't tried it you should because it's socially dosed. The this is a light two milligram drag on accidentally drank 10 cans, which would be the equivalent of two studies.
You might accidentally to gummies and that might be over serving for.
Whereas one can pack of the over of you could have a half.
So bringing in people that don't smoke pot and aren't really familiar with that and don't want to get too messed up or whatever ends up a very very attractive entry and it's an instant situation where people love the flavor sales have done an excellent job formulating the product the brand it works.
That's what attracted us to it.
In terms of your first question on media assets.
Got it.
I don't know of I would say everything's on the table if it makes sense.
We are open for a lot more conversations happening broadly it seems like everybody's interested in candidates here we are with the.
Series of unique assets sort of perspective.
Of what's going on so we're open for lots of conversations.
Thank you.
Sure. Thanks for the question.
Thank you and there are no further question at this time for centers you may continue.
Great. Thanks, everybody for dialing in for going back a few months.
Well see in Vegas and enjoy the ride over the next 90 days. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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