Q1 2021 Green Thumb Industries Inc Earnings Call
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Good day, and thank you for standing by welcome to the Green thumb industries first quarter 2021 and earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask the.
And during 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 and good afternoon, and welcome to Green Dot and the first quarter 2021 earnings call and 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 your questions may include forward looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements.
These risks and uncertainties are detailed and the companies are free to buy 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 for.
Reported along with today's earnings press release can be found under the investors section of our website.
And sort of 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.
And the discussion Green Dot will refer to non-GAAP financial measures, including EBITDA and adjusted operating EBITDA and reconciliation of non-GAAP financial measure to the most directly comparable GAAP measures is included in our earnings press release and S. E T and E filing. Please note all financial information is provided and U S dollars unless the other.
Alright, and indicated thanks, everyone and now here of that.
Thanks, Jennifer.
Good 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 and our business continued into the first quarter of this fiscal year.
Following a solid fourth quarter and 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 of debt raise which followed the first quarter's equity rates.
This puts our balance sheet and excellent position to play offense.
We're off to a very strong start in 2021, and we are even more excited about the opportunity ahead for the balance of the year.
We have set and many times, but it is worth repeating.
We believe candidate and the next Great American growth story.
Maybe of the classic American themes over the last 250 years exist and the story of cannabis and America in this century.
We believe things are changing and America and Green thumb is well situated to take advantage of that change for our stakeholders.
The rest assured as large orders 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 positioning and New York and how we will leverage the adult use opportunity.
And a full circle moment for the industry Green thumb is turning the former federal prison. The once the incarcerated people for candidates into our New York and cannabis facility.
We see this as a self contained economic stimulus package fueled by the demand for candidates.
When completed it will create hundreds of jobs and.
Generating 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 and parameters of Patterson and the third store opening and the coming months.
This is in addition to the potential along the East Coast and places like Pennsylvania, and Connecticut, Rhode Island, and Maryland, and Massachusetts to name a few.
Tourism is coming back to the math 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.
Dissipate and a lot of excitement with this flagship openings.
Looking again at the map.
Well the good common sense and 2020 to say candidates in the essential.
There is still a large part of the country and does not have access.
But this is changing.
And April Virginia, and became a 16th the states pass adult use and just over a week ago Greenfield announced the acquisition of <unk> Pharmaceuticals.
The AMA operate the cultivation facility, one dispensary and was a first mover and the Virginia market.
Following the close 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 our highly desirable markets with large potential and then opened and scale through methodical execution and a focus on the consumer and.
The right time, the right price and with the right products.
That means and retail stores cultivation and production capacity.
At the pace to support the market, which takes the careful planning and capital.
Most importantly, we listen to what our consumers want.
Our core objective has always been to be a leader and cannabis products that create real relationships and real experiences with the consumer.
And we believe it is fundamental to our long term success.
And it's 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 and the revenue contribution from retail and CPG production, which we expect will continue to accelerate.
The beauty of creating high quality honest trusted products and several fold first great brands and products drive people to stores, whether it's our dispensaries or others revenue.
Brian and scout flies off the shelves and dog walkers are sought after by name.
Second there are so many ways for continuing 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 through creative partnerships.
Last quarter, we announced our partnership with can Californias number one cannabis beverage.
And are excited to expand our beverage offering and will begin to rollout can and across our markets.
The last candidly, Illinois ahead of for 'twenty, two and 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 and over and in Illinois, and give it a try and you can't do it.
We have a lot of growth and the portfolio of by leveraging our current assets and based on market conditions M&A can be an attractive option.
And now talking about acquiring trophy assets, but rather opportunities for geographic reach our brand portfolio or our infrastructure.
At the end of the day three of them as and execution driven consumer focused results oriented team and that high standard puts guardrails around all of our decisions.
And as I've said many times before everything is on the table if it makes sense for our stakeholders and while we're in a fortunate position to have a strong balance sheet. You also know that every dollar we invest most of 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 engaged and commentary Anthony.
Thanks, Ben and Hello, everyone.
And to what is now our <unk> earnings call as the public company.
Instead of just highlighted our team delivered record first quarter financial results generating $194 million of top line revenue and over 71 million and adjusted operating EBITDA yet.
Total net revenue for 10% quarter over quarter with growth CPG and retail revenue both growing by 8%.
As a reminder, the difference between growth and depth of the 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 and Kansas consumption across the country. There is no doubt that this is particularly true and the markets within 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 and producing products that people are choosing to buy with the harder.
Our efforts of the facility design the focuses on quality over quantity as well as our product strategy. The leads with the consumer and starting to establish true differentiation and the market.
Third execution.
This boils down to a few simple concepts, we live by here at Green Zone.
Number one and do what you say you're going to do the.
And this holds true and our daily lives whether that's.
<unk> with patients and consumers were making and internal commitment to and other teammates.
Let's go to the simple ramp, particularly the start.
This business and industry of enough complexity already.
Third embraced the team.
We've said it before but our team is our greatest asset we of passion for.
And for knowledge and the competitive spirit that run through all of US said differently, we'd like to win.
That's the financial speed and addition to strong top line performance. The company continues to post robust gross margins with Q1 coming in at 57%.
I know folks are probably tired of hearing me say it that are intrinsic goal is to keep this metric at or above 50% over the long term.
And the SG&A side, excluding D&A the stock based comp normalized operating cost totaled 42 billion of $4 million increase of the $38 million 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 and interest and the warrant expenses associated with our senior debt.
As a result of the company generated over 71 billion and adjusted operating EBITDA close to 37% of revenue.
In addition, we generated over $10 million and net income or.
Our third consecutive quarter of positive EPS.
And the capital front, we continue to manage our balance sheet the way that maximizes the operational flexibility for.
And the basketball and is out there it's our version of the Triple threat.
And the sizable cash balance and positive cash flow from operations and the ability to buy and bill for search.
Times, our favorite and do that.
Alright.
None of the 156 million of equity raise in February and we ended the quarter with over $275 million of cash.
As you work your way and that our balance sheet you see the following.
Low relative accounts receivable.
The inventory balance and the <unk>.
The number of sub $10 million for the first time in 2019.
The new technical accounting codes and puts our current ratio of industries.
Subsequent to quarter and the company completed the 217 billion and self conducted debt raise and adding over 100 billion of net cash to our balance sheet and industry leading interest rate.
And then the gross of the cohort continues to create substantial value for shareholders and the fever zero percent and non res is fantastic.
On the pro forma basis, the company has in excess of 301 of the cash.
And we're excited to put these dollars to work as we aggressively invest in our markets and standards.
Difficult regulatory change.
And while we are proud of our first quarter results and you can't help the focus on the future.
Because we sell each of our new hires.
And the very early innings of this industry.
So buckle up hang on tight and removal of assumptions.
And the meantime for all of our stakeholders, we will continue to run a napkin math and.
Execute our growth plan and two entitled wafer demand for the U S. Kansas.
That's the event.
Okay.
Thank you Anthony.
We are off to a great start and excited about 2021.
We've 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 of that 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 wellbeing through cannabis.
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 donate first day profit to every community, where we opened a new store.
We have expanded our dog walkers donation program to include the Bally legacy funds to support the animal rescue organizations.
And our home state of Illinois, we have been advocating to get Illinois, Social equity program started and look forward to the potential of lotteries for new dispensary licenses soon the day.
The lay of the licensing process has created substantial financial burdens for social equity candidates, many of whom have been hardest hit by the pandemic.
Hopefully this process is beginning to move forward and Illinois.
And in New York, We believe New York and lead in this respect by starting of adult use on January one 2020 2023, not only with the incumbent operators, but also by issuing new licenses and a timely manner to new licensees, who are part of the law shall be.
Heavily weighted towards social equity entrepreneurs.
Finally, we are committed to outstanding corporate governance, and are especially pleased to welcome swampy Alibaba and boom to our board of directors swap and the use of trustees of the growth Trust World renowned educational charity that supports the exceptional students to study the Oxford University.
She is also a board member for both Dot Org and aims to increase voter turnout and strengthen American democracy.
We are clearly aligned on our core principles.
And 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.
And and the interest of the time, you would like to remind participants to limit their 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, Sir Your line is now open. Please go ahead.
Thank you good afternoon and.
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 and SG&A is if 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, and Hey, there thanks.
Thanks for listening.
And.
I was referring to gross gross spend of $1 nine percentage.
Yes, we will see how much we can grow the top line, but we anticipate overtime and kind of maintain nice operating leverage within the business, but I think the growth SG&A dollar side.
We continue to increase over the coming quarters.
Understood. That's very clear. Thank you for that and then my follow up question and then it's for you and for a little bit more of a strategic one clearly on the flowers and out of your business Brownie Scout has been a homerun beef and hearing about that for.
And number of quarters now I recognize that the U S business and and the way you pay the rent and your business is very very different and then Canada, but one of the kind of unfortunate and learnings out of the Canadian marketplace is that the consumer preferences in terms of flower strains can today.
So and and pretty quickly or at least it seems like it caught some of the Canadian operators of all card. So I'm just curious.
How do you guys keep your finger on the pulse in terms of and strained preference and then if you could offer any kind of.
The.
Sales of the the percentage of your overall flower sales that brownie scout the accounts for that would be helpful. Thank you.
Sure Yeah, great question of and insightful and Youre right.
Tastes evolve and and strains evolved and things like that so we're very heavily invested in.
And breathing evolving the strained portfolio and delivery for consumers essentially the best trends around and so while we don't talk about a lot of the other streams out there whether it's the suits the T. The portfolio, Jack and the Orange and sour diesel which right now are just two of grade or the white Durbin that we recently released for the East coast.
And there's a lot of great things and the portfolio. We just like to talk about one since it does so well because of the percentage of revenue it's not huge.
Not a significant piece.
And I, even know it offhand certainly want more of the consumers want more certainly of the effect for the medical patient and for the the relax effect of the and because it delivers is one of the cut that's why it stands out but we're not betting the company almost any single strain and.
Nice to the Canadians the carpet to realize at the California kind of told you that for the last couple of decades strength matter and the genetics matter and this is a very important nuance in the space.
Okay, Great. It's great to know you are not materially over index and to that one strength. Thank you very much.
Sure. Thank you.
Thank you. Your next question comes from the line of Matt Mcginley Your.
Your line is now open.
Thank you.
IPG business it looks like the gross value of product is sold and wholesale increased nicely sequentially, but the amount and you sold internally decreased modestly and then I would.
The hope that you sell the product and your stores, if 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 slight decline and and.
And product that youre selling internally.
Hey, Matt entity here.
Yes.
It was relatively flat actually kind of quarter over quarter.
But given kind of the nuances once you on bad debt, there's a lot going on within each of the state markets of the operate in.
And it's really not a number that we that and kind of the target or manage towards.
It's one of the just naturally falls within the business.
And so while we didn't kind of senior company and kind of revenue grow at the same quite the rehab historically, we're not we don't read too much into it just based off of what we're seeing within the state for sales.
Okay.
And the capital raising and cash balances between the equity raise and the debt you brought in over two and a $50 million year to date and the proven you've been able to generate cash and I would expect that that would only improve but even as you spend more on capex and if you did a lot more M&A and 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 and that is how much cash you need to run this business and are 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 the tenant 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 had these larger balances and just holistically and thinking like what's the.
What's the right amount of cash that you need to run this business and drive.
Sure, Thanks, Matt and it's Ben Yeah.
And finally, the exact science and it's like really well with the fortress like balance sheet and candidates being federally illegal and with the lowest cost of capital even against others and federally legal domicile locations.
And we think the opportunity of the Mets. So we're seeing annualized numbers costs of $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, while investing aggressively into the business I mean look across the state opportunities, Illinois, and Ohio, Pennsylvania, Maryland, and New Jersey, New York, Connecticut, and it keeps.
All of them have significant growth based on the size of the market even if you.
Take care of conservative assumptions and cut it by 2030%.
So we're not really managing the business for the amount of capital the.
The the cash equity split people want to own our stock.
And we're we're flattered by that we're happy with that we don't want and give it away.
And the treasurer here.
But we're comfortable with data of the share count we've got we're managing that carefully and we believe we can create very significant accretive value of whichever part of the income statement and you want to measure and put a 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 and we don't know where the capital markets are going sure one day of listing and 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 and that and.
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 Com and your line is now open.
Congrats on.
Another impressive quarter here.
So bit of a follow up to Matt's question here.
He has been of great job lowering cost of capital through these non brokered institutional capital raises and.
And yet at the same time.
Good day.
Canvas dock and 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 cat the public markets here and.
Whether you're seeing any broad changes and our compliance risk appetite.
And whether institutions are shying away or warm and up to the idea of take non U S candidates exposure.
Yes, it's the I'll take that it was and that's of Great insightful question, because that's really a part of the core issue here.
And I would say you know proposed sort of putting the name of in 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 as of the space.
And that and you know us and and others do too we are literally bring and 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 and.
And that's where the supply is going and.
And we're bringing in 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 you 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 pounds and the investment analysts are.
Unbelievably excited and cannot those who see it are sort of surprised by the weather, we call and 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 and accelerated fast motion and in fact accelerating I mean, you've got New York, you've had the Turkey, and Mexico, Theres more and more happening and now you've got Georgia, but hopefully the nature of these licenses and Virginia, just legalized and maybe Mississippi and Theres talk and other places.
So we see it.
The 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 in 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 and it's not a one size fits all situations, we're building a business for the.
Long term for shareholders investing capital into the market opportunity and the U S and we think is somewhat unprecedented.
So 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 and the spot where and what I think broadly the capital markets are and they're nice and neat.
And at this stage.
Okay, Great. That's that's that's helpful. All right great color, there and then and it's been of a follow up.
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 some inside of some color on sort of how you guys.
You know 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 and you sort of help us understand how you guys think about that trade off there. Thanks.
Yeah, we think about it like I mean, this is the ultimate game right the capital allocation and how we put capital and where we put it in and what kinds of returns for what the business is going to be when and what the board of look like and it really just kind of a multi dimensional situation with lots of different states and markets and things. So you know we look at our cards.
Fortunately, we can see everybody else's cards and when we make the bet based on the most basic principles possible I can't remember the just call or the other one when you talk about what is the formula or the Kelly principles of how you make part of our beds and the way we think of our wagers on behalf of shareholders. If the since our money and use of chips and we're planning of the table, where we're trying to take one plus one to make for were putting.
And 100 to create 500 and the <unk>.
Simple math of.
And they make it up and say 100 million dollar of investment to create 50 or 75 million of EBITDA and <unk>.
Over multiple you think the market is going to trade. The EBITDA of 20 make it up the 1 billion of $5 of of market value creation.
Can we put that under the work well guess what there's many many places we can put it to work because of tens of millions and in fact over 100 million Americans, who are really really interested and want and that demand for the product. So it's about a symbol of the 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 up.
There.
Okay.
Right.
Yes, alright. Thank you moving on your next question comes from Camilo Lyon from D. T. I G. Your line is now open.
Thank you very nice quarter guys congrats.
And particularly in light of how difficult February was so I'm curious snow after putting up the call. It a 10% sequential growth in Q1.
Was the exit rate.
Coming out of the quarter relative to that 10% and.
And the and club EBIT share as to the momentum that you've seen thus far into Q2 would be very helpful.
Yes, it's a great question and type of what I would say when we sat here for literally the same seat and I think it was March 17th Wednesday, St. Patrick's day, the day, the stimulus checks came out because of the.
Business reported from others, you've seen it and the data.
The things change and the back half of March.
So the market woke up so I wouldn't say that and elevated above the sort of caught up to February of being well take the Illinois and market data and you know 80, 880, and the back popping up of above.
And 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 some kind of dramatic acceleration.
For 2000, and 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 every state and gives you the data and you can see that.
And then a few things, which stores are opening and what's happening so no material change really and price and our 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, and sometimes coming at the beginning of 2022.
Thank you for that and and that actually leads and my second question about.
And your back half expansion plans if.
And if he can you just remind us what projects are coming out of them coming online and the second half are in the states that'd be very helpful.
And how we should think about the really robust margin that you delivered in this quarter understanding what you said Anthony about maintaining.
Maintaining and 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.
And through the balance of the year, if I'm thinking about that and correctly. Please.
Correct me, where all of them.
And I think that's right.
On the ground, what I'll say is like Anthony eventually what kind of.
Targeted at 57, and how do we get the 59 and where do we have to try them and said 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 scale this thing and we think there's a lot more production coming.
Simply because there's a lot more demand and there's a lot more demand and people that want a lot more of our products were out of it thinking about it and that way. So we're very comfortable of making investments into the business. The it means the margin goes down but it's.
It's not a core focus and so we're trying to build the infrastructure that really hits. The SG&A line more was the revenue is accelerating and the gross margin scales and amazing thing and also and you start to work on yields and you start to see real details and 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.
And we believe we have of National model and believe we can bring premium indoor flower of the consumers across the country, who want it it's as basic as possible and there's more upside to go to the next quarter I don't know, but in 2023 and 2020 for where this business and it is and the scale. We have based on the capital we're putting in and based on the demand, we see and just make it up.
New York, and Virginia, and New Jersey, and that the biggest Candida alone I think there's maybe only 30 or 25 licenses there currently.
And it's only the first mover and then we think there's got to be a lot more people and the industry and it's got the access to capital and hopefully and OTC gets around doing a few things but.
And it sets us up pretty well.
Thanks, very much and good luck.
The question of thing thank.
Your next question comes from the line of Michael <unk> from Piper Sandler Your line is now open.
Okay.
Thank you good afternoon.
And Michael.
Just wanted to follow up a little bit of the industry certainly is.
And accelerating point with so much the legalization momentum and your balance sheet obviously.
So the two up really well can you just give us a sense of how youre thinking about capex and and any ability to quantify what to think about for for this year and 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 he and which is kind of before the before and the sale leaseback of reimbursement.
We spent about 113 million last year.
Q1 of our gross spend.
The $32 million.
So I would anticipate our gross capex spend this year of certain.
Greater than it was last year and.
As you know, we're not we're not the greatest likes to talking specifics, but with.
And with the balance sheet debt.
And the markets that we have in the and the regulatory change that's coming and we're going to lean in pretty aggressively as I said my stated remarks.
And would anticipate that the Q2 between the Q4 the.
The capex should accelerate from that 32 number.
Okay, that's helpful and that's it.
The related.
Follow up can you.
Touch on obviously you <unk>.
<unk> got the debt at 7%, which is the debt by far the best cost of capital among any of you know and and the industry but.
And you can 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 and where the pricing is for US is more alignment with the the debt providers are.
Where we think that cost of capital and look with non ear and I talked about 6% of that 7%.
If we could get 5% and we're not really like looking at the refi quickly the.
The way of the structures for us on our balance sheet is three years and we have an option for a fourth year. We think the next time, we revise when we're exposed to the sort of of normalized capital markets. We've been told the business performance in the.
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 and its two times.
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 and 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 something of a year of fill out the rest of it and be out of the opportunities.
Think of hopeful for the everybody else and industry and to be able to continue to drive down the cost of capital also.
And that should happen, but it's you know the capital markets are thin and we've all seen so we like our position and there's no.
And for Us to go and do 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 corner of thanks for the questions.
So first hey, how's it going so first question for me as a live and around M&A.
M&A you know.
Great to see the acquisition and for.
Junior with adult use coming on line there and the next couple of years and flowers, starting but would love to get your perspective in terms of you know how you think about you know potential additional M&A.
The M&A, particularly through the lens of the chance of there being some changes at the federal level or your thoughts on that you know, there's there's been some some peers or others out there who have started to make some moves and anticipation of there might be in the change at the federal level and how you guys think about that you know and the near term and your acquisitions. Thanks.
Sure.
And 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 but we're pretty aggressive and knowing what's going on and the space. We're very U S focused.
We think the actions here in the United States with the emphasis of American story, the only thing.
The as the U S execute says and industry and the country. The world will work what we have.
Capital markets in spite of amount of pretty.
Pretty efficient here, so we're comfortable with that and just look at our history of the raise debt and invested in the business. We're looking at what's happening of the cycle of capital markets. The fun part of our candidates of the hyper speed. So we've got feast and famine ups and downs and.
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 thesis we've talked about so whether it's going to be and enter like the virginia or of scale like whatever the last year, we bought a store and Connecticut, just scale of the business and.
The other strategic plays like that we've been active for five six years, sometimes like Anthony said and 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 is pretty carefully and we think we are.
Understand what's going on and on the ground and therefore you.
You know it gives us a little bit of of edge with information and I wish to make decisions of whether that data driven or personality, driven or legislatively driven and whatever.
That's the recipe by which we use last time 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 the somebody that might happen later.
We 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 you feel of tens of millions of Americans want candidates and don't have it so we need to make it really fast and really good and that's what we're up to.
Great. Thanks, that's Super helpful color and then second question for me. So just given your strength and balance sheet, you know and 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 hasn't.
It hasn't been a ton allocated down there for you guys, where you had some other high priority states, but just given your strength and balance sheet. You know you've often talked about you like the market you know longer term. So does that kind of give you some capital to may be put towards that market and look to grow there, especially with the potential of adult use of being on on the ballot there in 2020 two.
Yeah, I think that's insightful.
Yeah, as we had more cash and exactly right and we looked at it through that lens and that would lead you to think of that conclusion, and yet or we're not kind of just sit with a lot of cash for a long period of time see 20 million Americans, who have of high interest and a very nice market people who've done a very good job down there.
So it's an interesting market and we will.
Studying and.
Alright, great. Thanks, I'll jump back and forgive.
Sure.
Thank you. Your next question comes from the line of Tableau Gerontic from Cantor Fitzgerald. Your line is now open.
And can I ask you about I understand this is the growing industry and you'll have a lot of levers, but the two per cent a same store sales growth sequentially can you give us some context around the number I mean like we interpret the Pennsylvania, maybe too many stores and I know you've done the market is growing kind of go rake eventually but for.
The other states, Illinois, and new stores are open and the recently I'm sort of price about 2% same store sales number and can you give some context context around interest and things.
Sure.
And I can start.
And we looked at and we don't see any issues and the and the business there hasn't 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 and look at state overstate Whats happened the fourth quarter. The first quarter of first quarter over fourth quarter by state wheelchairs, and 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 and 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 and the store 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% and 48 stores. The other big thing is the big base. So the numbers you know how the comp base over a year of 40 and 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, it's a big barge and big market share yet the market is going to quadruple and front of all of us.
Right. Thank you and then just a follow up of New York and 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 and your views in terms of about one distinct and stuffs stop selling flower of if you've got some insights from the thank you and the medical side.
Sure I can take that also has been.
But we think new Yorkers and also market.
We think the structure of the market and sets up well and that was about execution, we've seen a good and tax law stumble and execution and Illinois, yet and still has a chance to the tumor successful we believe to just put the dart out there. The one $1 23 January one 2023 would be a day at the New York and opening of adult use and they can do.
And that's where it's not the current incumbents of which GTI as one of them only and no grandfathering and then instead of based on the timeline of the based on the laws of the read it and the commission and all the things and New York is doing and and they're pretty focused on doing a nice job and they 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 of new entrepreneurs with the chance to generate new wealth. We think that's a big part of it there's no real product rules, yet and so.
For the market the law because he said, yes, the flour and we've heard others, who are really carrying the load and we're appreciative of that pushing this forward because obviously the medical patients shouldn't have access the flower for wellbeing, it's common sense, yet rules for tough 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.
Execute and 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 and the event. The market has the Interstate commerce element to it the.
Early days of the GTI story really talked about that.
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're talking about the the distribution at scale and how.
Is there a potential war chest for your existing asset base factor into a situation, where you were looking at distribution coast to coast and.
And the existing cultivation coming on line.
That's very much serve to expand on the existing state markets and 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 and that's been or potentially using more third parties and the supply chain. Thank you very much.
Sure Hi, Graham and yet I mean, it's the same story.
Bruce's theres huge demand within the markets and like we talked about the last call you know and we said.
This call business is very good under the current situation and we think theres an opportunity more than a threat with the Interstate certainly of need more but you've got to think about the supply chain.
And 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.
And not something that we lose a lot of sleep over.
No what the products are of a lot of other make them at scale for making them at scale and markets that have 12.
12, 13 million people 20 million people.
40 million people of up in California. So that's those are huge markets and obviously the reach analogy and 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 and like where we are I think it was also really crucial is the <unk>.
Since the of the product.
And you can't just make it everywhere and ship it and then and even like did the go, especially as you get closer to the flowers and further away into the end of the refined products the gentleman and isolate it's easier, but the consistency of 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 and in Virginia and the.
And there's been some chatter about the potential timing of of the start of adult use being brought forward and that relates to your capital allocation decisions and and the capex expectations that were outlined earlier and the call.
How much of that might debt directly to Virginia, or how quickly could you and 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, there's been but and so you don't be shy of the AR.
And what's happening with the legislation like I've said, many times and the legislation and the state or federal side of being more so of it is a trailing indicator. 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 standard medical and we understand it's going to rack, there's a lot of nuances for how that works and it really doesn't impact the capital decision.
Like a do not enter sign and of no chance for adult use and we might change the plan.
But the plan 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 consumer and don't want the brand and product and now we know how to make them at scale and at scale without the need 5 million people.
We're also thinking what states are around how does this look and what happened to reach now moving to your question for Virginia is a great market and it's a pleasure to see you know.
Canada is coming through and area of the country that really does not have it.
And 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 Pars and hue from Stifel. GMP. Your line is now open.
Hi, Thanks for taking my questions and congrats on the good quarter guys.
Maybe if I can you know come.
Come back to the discussion of <unk>.
Of the dynamics in March and into Q2 could you talk a little bit about <unk>.
The pricing or promotional environment.
You know.
People, receiving stimulus checks was highly anticipated and.
And.
Wondering if.
And 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 and and now.
What those may look like after after the for 'twenty and and the stimulus check period.
Yes.
Okay.
And revenue here I'll take that so.
I think.
Trying to read into the question of whether you're essentially asking if we ran promotions and March to kind of combat the softness that we saw in the early part of the quarter.
So that's really not the case.
And just kind of run the business.
And I'll remind you that one.
One of the one of the benefits of our business that we still operate and the number of of supply constrained environment and so.
Even though the operators don't have a huge appetite to kind of do.
Still 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 watching that but there is nothing there is nothing kind of that normal or anything that we did.
And where we had a discussion the amount of Te.
I will say, hey, we need to do something about debt. So ran our we ran the business ran the playbook and.
Similar checks came in and and people see exactly what the kind of burden, but the mentioned during the last call.
The purchase more and more product.
Thank you.
We probably weren't the only beneficiary of that.
Yeah.
Thanks for that and.
Maybe just talking about New York, a little bit more you know the.
And the regulations haven't haven't been out yet.
Within the law and give the regulator a lot of power to the place any kind of caps or restrictions.
And and yet.
You are you've already secured your your platform for production there.
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.
And you know whether you think there would be any any production caps and and how your strategy.
With your production footprint that you've already acquired plays into that.
Okay.
Sure. This is Ben and I can tell you we talked about it I'm not sure how much new news is we think theres going to be a tremendous amount of demand.
To build the high quality products, we know we can make.
Of an aggressive capital spend and class.
States has not issued the rules yet the committee and there were pretty early on and then go to the website and 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 are working pretty hard on getting the 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 Leap program, which is the application of assistance program its hard to apply for a license.
And so as we can educate folks on coming into the space, We're gonna make the product and I have our stores and we hope others have stores like I mentioned, we're throwing the dart on one 123.
Based on the exact science of and zero of lobbying is just based on what we think would set up well for the industry for everybody who's invested and that's going really really well it was three or six months earlier of three six months later.
Make it work.
And why not start some of it was a pretty lofty goal like bring others and day, one and we're going to aggressively build but we know how to make the things that you would had version 123 and four and made a lot of mistakes and hopefully we can not make the same mistakes and New York.
Mark.
Thanks for that congrats again, and 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 and a real quick thoughts on California had been you opened up the testing of Stuart and I took a while but you are there any color on kind of trends and momentum and thoughts around building out of California and all.
Thanks, Scott Yeah, that's in the OLED.
We see a lot of the COVID-19 restrictions still going on in California, and I think that's opening up stores off and I start the momentum you up into the right as we say Oh, well continue to refine the menu selection build loyalty and the state we're aggressively looking at what's going on and California, I think it would be foolish not to.
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 are like and the now.
So, California, and we're watching we're studying like our position, which is not of lot of capital at risk.
Got it and then two other states the.
And Mike, Nevada, and Massachusetts, and as things open up here are you seeing.
Favorable trends from that standpoint, and then there are these two states and like the the can and investment makes sense to move forward and into other states and thank goodness.
You'll you'll want to some other states going forward.
Yeah, and we see little little difference between Nevada, and Massachusetts, Massachusetts, and remain strong and and get really a trend.
Parents of the end of that market and we plan to scale production, we need more of a profit there.
And we plan to expand retail non administrative we're sitting with one so look for actually come in Massachusetts, and Nevada, We see you know our business is not as heavily levered to tourism.
And so it didnt 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 and burner, but do you think is right. So the plan to play that but both of the state that you'd be pretty good transparency on a monthly basis and see them come back pricing firm and both states. There's a lot of momentum for our <unk>.
And the others are as there's just good growth and both of those markets and we are of a couple of more stores, we can open and Nevada, and we should have this year and in Reno and one more and the Vegas area.
And our and the pipeline.
Great and 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.
And I think of couple of months ago, and you gave us your kind of priority list.
And in terms of capital allocation and in certain markets, where were your AR with the prioritize capital spend.
And just given the developments and 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 and.
The New York is kind of at the top of that list and.
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 and the eight 5 million people and what's the current market size, whereas the job you've seen the movie before.
The called Illinois, and Pennsylvania, It's just the.
Literally it's not about anything that fancy, it's about how much profit consumer and what not.
The major Red flags and the legislation meeting some structural irregularity or like vertical for us for no product of potencies of something.
And most of these markets have a pretty set structure for how they're gonna uncle.
And.
The New Jersey, right, there as well, but 9 million people of waiting on the rules and wait for this thing to get going huge amount of demand.
That's great and just the follow up and 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 your thoughts on where do we start to find the kind of normalized gross margin profile going forward and do.
Do you think we're kind of approach and that level yet.
And kind of and the Q1 period or do you continue to see wait and room for the.
Got to move higher.
As you scale out of your production and cultivation activities.
Yes look.
It's a great question and that's really hard question to answer.
So you know part of the reason is because given the growth of the business.
What we have going all of it is we're obviously investing heavily for the CPG side of the business. So over time that should become a greater percentage of the overall business and.
And when you unpack kind of the gross margin the gross margin of retailers and 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 and you lay them out you have a number of facilities right now that are achieving scale or call. It operating at scale and 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 all of that and all that gross margin line. So I.
I think it's you know I think it's difficult for me to sit here and tell you, where I think it's going and where I think kind of the the true kind of potential is and that line item and why.
And the benefits of the business is that with with solid cash flow from operations and the health and cash balances. They don't have to sit here and manage the gross margin for a specific number.
And make bets that we know will pay off the two to three years from now and 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 of puts the shareholders.
And our position.
So I think you'll continue to see us lean in of the CPG side of the business, where we know that over time, we can get more kind of gross margin leverage.
That's great color and the many appreciate that and congrats again.
Thanks.
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 and Illinois.
Obviously, it sounds exciting, but just curious the doubleclick and maybe on the learnings there in terms of manufacturing maybe initial demand and the category potential outside of California. Thanks, Scott.
Sure.
And I'm, taking the second one the first can we're excited about the launch.
Can you just see like everybody. The beverages are not a big part of the category for you.
Talked about off Prem versus on Prem, where all candidates the soft prime and we think thats changing slowly one of them.
And part of that.
We've made some place for that.
Yeah.
And 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 and you should because it's socially dosed. The this is of light two milligram drag of accidentally drank 10 cans, which would be the equivalent of two studies.
Accidentally to gummies and that might be over serving whereas one can and back of the over and you could have a half.
And so bringing in people that don't smoke pot and aren't really familiar with that and don't want to get messed up or whatever.
And up a very very attractive entry and it's and instant situation, where people love the flavor of it hasn't been on.
Excellent job formulating and the product brand and it works and then you know.
And that's what attracted us to it.
In terms of your first question on media assets.
Got it and do that.
I would say everything's on the table and it makes sense were open and there's a lot more conversations happening broadly it seems like everybody's interested and canvas here we are with the.
Series of unique assets and the perspective.
And 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 them back.
Three months.
Well see and 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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