Q1 2021 Terrascend Corp Earnings Call
Okay.
[music].
Good morning, My name is Joana and that will be your conference operator today.
At this time I would like to welcome everyone.
<unk> first quarter 2021 investor call.
As a reminder, I would like to advise listeners and participants that today's call is being recorded and a copy of that recording will be available. Following the completion of the call I would now like to hand, the conference over to your first speaker today, Dan Foley SVP of Treasury. Please go ahead.
Thank you Joanna and good morning, everyone. Welcome to <unk> first quarter of 2021 conference call for the free.
Period, ending March 31, 2021, Tony.
Joining us for days call is Jason Wild Executive Chairman Keith style for our Chief Financial Officer, Greg Laughlin, Chief Executive Officer of Northeast operations adjacent March Chief Legal officer listeners are reminded that certain matters discussed on today's conference call for answers that maybe given your question Patrick.
For you.
And uncertainties relating to <unk> future financial or business performance.
Results could differ materially from those anticipated in these forward looking statements. The risk factors that may affect results are detailed in tariffs on MBNA and other periodic filings and registration statements.
<unk> may be accessed via SEDAR database I'd like to remind everyone that we began reporting results in us dollars per quarter and as a result, all figures are in our prepared remarks are in U S dollars unless otherwise noted. Please note. This call is being recorded today Tuesday may 19, 2021, and I'd like to introduce Mr. Jason Weil. Please go ahead.
Yes.
Good morning, everybody.
Welcome to our growth.
Thanks for joining us today, sorry about that.
Our last conference call in March we have made progress on many fronts, we just posted quarterly record quarterly results.
For the Berlin market doubled our dispensary footprint in Pennsylvania, and continue to invest in organic projects to lay the foundation for strong growth beyond 'twenty 1 day.
For the significant progress we are increasing our full year guidance net sales are now expected to exceed $300 million up from our prior guidance of at least $290 million and adjusted EBITDA is expected to exceed $128 million up from our previous guidance of at least $122 million.
This would translate to more than doubling of our net sales.
Almost tripling of our adjusted EBITDA year over year.
Few companies are experiencing explosive growth. We are currently collaborating with our operations. Our targeted investment strategy is yielding growth and margins that are among the top of our peer group, we continue to invest in our existing operations, while pursuing accretive acquisitions to fuel continued growth.
Overall 2021 is shaping up to be another banner year for Harrison.
And its shareholders.
Now on to the results our continued focus on execution and operational excellence delivered yet another quarter of strong top line growth gross margin expansion SG&A leverage and positive cash flow generation.
Profitability continues to be among the highest in the industry with adjusted EBIT margins, reaching 42% in Q1.
Taken together, our northeast operations in Pennsylvania, and New Jersey represented around 80% of our Q1 net sales.
Also with the recent closing of HMS, and Maryland, JCR in Pennsylvania, the significant majority of our expected 21.
This mix is anticipated to come from these.
3 high growth highly profitable limited licensed markets.
Turning to an overview of it on.
Operations as I mentioned, we closed the acquisition of <unk> on April 30th which doubled our dispensary footprint in Pennsylvania.
The mid single digit adjusted EBIT multiple for ACR and it will be immediately accretive.
This acquisition gives us more contact points with our patients diversifies, our customer base and will enhance margins for deeper vertical integration.
Cultivation and production output at our Pennsylvania facility continues to scale.
Output as measured in grams per square foot of canopy space continued to improve enabling margin expansion in our operations there.
We continue to distribute our branded products to 100% of the dispensaries in the state.
The power on the brands in our wholesale distribution can be seen in recent third party data, which showed saracen, having built a clear leadership position in the important flower category, which makes up nearly half of all product sales in the state.
Our country brand now represents 28% of all flower sales in the state 1000 basis points ahead of the nearest competitor in.
In addition, alrighty Alero Brexit tinctures are number 1 in that category.
From this data that demand for our products is robust as such we are currently expanding our existing production capacity in Pennsylvania to further fuel growth into 2022.
As we integrate on 3 new dispensaries sales.
Sales at our 3 existing apothecary Amgen, Pennsylvania has continued to perform well.
Our number of active patients has grown more than 4 fold from Q1 of last year with our average order size continuing to be very strong leading to extremely robust retail throughput and sales per square foot at these locations.
As we move through 'twenty, 1 we are excited about the future potential of the Pennsylvania market.
While we maintain our leadership position in branded cultivation and manufacturing and have expanded our retail presence with the addition of the KC. Our dispensaries, we're continuously working on new and innovative products formulations and form factors that will appeal to both our patients and to our wholesale customers.
Sylvania remains 1 of the top cannabis markets in the U S and we continue to believe there remains tremendous potential upside from here.
Turning to New Jersey, we continue to execute on our growth strategy and with the passing of adult use legislation, we are extremely well positioned in this emerging and underserved market.
Our current cultivation and processing business in New Jersey is now fully operational and we are prepared to meet the expanded market with a broad array of high quality products. When adult use sales begin later this year.
As for retail operations, we're pleased with the ramp up on our first medical dispensary at Phillipsburg, which opened at the end of 2020, our second day sensory opened in May in Maplewood County, and Northern New Jersey, located within the densely populated stimulator.
Can we get a cargo.
New York City.
Excellent extremely excited about the maplewood dispensary size aesthetic on throughput capacity when combined with our cultivation and processing.
Capabilities.
Location is set up to be 1 of the top performing dispensaries in the U S.
Our third dispenser location is on track to open in late <unk>.
Summer and in other densely populated town in the northeast part of the states all 3 dispensaries will be branded as the apothecary.
Our 120000 square foot cultivation and processing facility is now delivering high quality flower and manufactured products for both our phillipsburg and maplewood retail stores as well as the wholesale market in New Jersey.
We expect our business to continue to ramp in Q2 with an acceleration of this growth in the second half of 2021.
In Maryland, we entered the market on May 3rd with the closing of the HMS Health acquisition, our entry into the $600 million medical market in Maryland further strengthens our foundation on the East Coast.
We look forward to leveraging our scale strong portfolio of brands and our veteran northeast operations team, who oversee our new Jersey, and Pennsylvania operations as well.
Over time, we expect to achieve full vertical integration and assume a leadership position in this growing market.
As part of this plan, we will soon begin a significant expansion of our existing capacity, which we expect to complete by the end of this year. This expanded capacity will enable us to better address the underserved, Maryland market consistent with our approach to other core on northeast markets.
Turning to the West coast, the operating environment in California is improving as COVID-19 restrictions abate or cash.
Totally on Barclays stores are ramping up.
And our existing flagship dispensaries in the Bay area are showing signs of tangible recovery.
At our San Francisco stores transaction volumes were up 14% month over month in March and in April are for 'twenty sales were up 67%.
Percent year over year.
Our apothecary on stores, where they only pay area dispensaries that were part of the U S launch of Seth Rogen is houseplant brands demonstrating that the apothecary this trusted retail partner and a premier retail experience.
In large states allow our reported its best lots of sales ever.
Stays flower is a popular brand within our California, Pothecary on dispensaries, representing approximately 30% of flower category sales.
And kind of the progression of our business continues and we see further signs of success of our clear and focused strategy, which is aligned with current market conditions are.
Our indigo.
<unk> continued its strong performance in Ontario, and with Us top selling skus during the first quarter.
We also saw positive reaction for the launch of our retro grade 3 5 Gram jar, SKU in Nova Scotia, and British Columbia, where it was the top selling SKU for the last week of March.
With our improved commercial focus on streamlined product portfolio. We are confident that these positive trends will continue.
To summarize we believe our first quarter results demonstrate the outstanding fundamentals that exist in our business.
We once again delivered record results and expect $1 21 to be a banner year for <unk>.
With the strong footprint, we have established in Pennsylvania, and New Jersey, and now, Maryland, we are poised for continued growth.
We look forward to updating you on our progress throughout the year.
I would like to now turn the call over to Chief staff for our CFO, who will discuss the financial highlights for the quarter as well as detail our financial guidance. Thank you.
Thanks, Jason and good morning, everyone.
As a reminder, the results I'll be going over to day can be found in our financial statements and MD&A on SEDAR. This quarter, we transitioned our reporting currency to U S. Dollars. So all figures discussed this morning are in U S dollars unless otherwise noted.
Net sales increased 106% to $53 4 million.
A year ago and increased 8% sequentially.
This significant year over year growth was driven by cultivation expansion in Pennsylvania and California.
The initial ramp up of sales in New Jersey, and the continued growth and ramp up in our 3 apothecary on dispensaries in Pennsylvania, and the 2 new locations in California.
Regarding net sales by channel, we grew our branded manufacturing business by 121% versus a year ago, while our retail business increased 77%.
For growth of branded manufacturing was driven by cultivation expansion in Pennsylvania, and California, while retail growth was driven by new store openings in Pennsylvania, California, and New Jersey.
It is important to note branded manufacturing with its healthier EBITDA profile represented 72% of our revenue mix. This quarter. This percentage represents the highest mix in the industry and is a key pillar of our business model and strategy as a branded manufacturer first.
Adjusted gross margin for Q1 was 65% compared with 60% in Q4.
Note that adjusted gross margin is a non-GAAP measure, which excludes fair value of biological assets and excluded a Q4 inventory impairment in Canada.
There are no adjustments to gross margin this quarter.
The 500 basis points on a sequential improvement in gross margin was primarily driven by greater mix of higher margin business in Pennsylvania.
And the initial ramp on New Jersey operations.
We have maintained our strong focus on cost control with SG&A, dropping 200 basis points year over year to 30% of net sales.
SG&A did increased 7 percentage points from Q4.
Half of that increase was related to onetime legal and severance costs, while the balance of the increase was related to planned investments in personnel systems and other capabilities to enable future growth.
While some quarters will show more improvement in SG&A as a percentage of net sales than others. We expect the overall downward trend to continue as we continue to scale our operations throughout the year.
Overall, we remain at or near best in class levels of SG&A leverage in the sector and our strategy to go deep build scale and leverage our cost structure teams and capabilities remains a central focus.
Q1, adjusted EBITDA was $22 6 million, representing a 42% adjusted EBIT margin.
Just to recap our quarterly progression.
Adjusted EBITDA margins improved throughout 2020 from 14% in Q1 to 24% in Q2 to 35% in Q3 at 40% in Q4 and now 42% in Q1.
These significant quarter by quarter improvements are a clear indication that our focus on depth scale and cost control is driving profitability levels, but all of them on.
On the highest in the industry we.
We see room for further margin expansion as we ramp up on New Jersey business and continue to expand and gain efficiencies efficiencies in Pennsylvania.
Turning to the balance sheet, we ended the quarter with a very strong $234 million in cash as a result of the $175 million equity offering that we closed in January.
This level of cash balance is among the highest in the industry.
In Q1, we generated $13 million in cash from operations.
While capex spending during the quarter was approximately $8 million.
As a result, we generated a positive $5 million of free cash flow for the quarter, our second consecutive quarter of positive free cash flow generation.
Due to the timing of tax and Capex payments going forward.
Free cash flow may continue to fluctuate on a quarterly basis. However for the full year, we expect that our cash flow from operations will be sufficient to largely fund our organic expansion plans.
Including payments subsequent to quarter end for the acquisitions of ACR on HMS totaling $42 million as well as the final elara earn out payment in June of $30 million, we expect to have approximately $160 million on liquidity on our balance sheet to continue to execute on our end.
On a agenda.
Also of note during the quarter, we received approximately $8 million of net proceeds from warrant exercises. We expect to receive approximately 40 million of additional proceeds from warrants that expire in January of 2022, and approximately $50 million of proceeds for <unk>.
And so that expire in August of 2022.
Lastly, before turning the call over to questions I will take a few minutes to discuss our updated.
'twenty 1 outlook.
2021 is shaping up to be a very exciting year for <unk> and.
And we expect to continue to achieve rapid growth.
The drivers that I'll highlight here are also expected to result in <unk>.
<unk> expansion of margins.
New Jersey will be a leading growth driver for us throughout the year as we realize the full capacity of the operation.
It is important to note that we do expect the scaling and growth in this new capacity to be back half weighted.
The operation continues to come fully on line for the remainder of the first half of the year.
For New Jersey retail Q1 was the first full quarter of operations at our Phillipsburg Dispensary are.
Our second dispensary in Maplewood opened on May 7 and our third Dispensary will open later this summer.
With our expanded cultivation capacity and growing retail footprint, we expect to see robust growth through this year in new Jersey, especially in the second half.
Finally, we are excited and prepared for adult use sales to begin in New Jersey. Hopefully later this year. However, we do not have any of that opportunity built into our guidance for the year.
In Pennsylvania.
Q1 was the first full quarter following the completion of our increased cultivation capacity.
Construction is currently underway to further expand our cultivation capacity by an additional 30 per cent.
This expansion is expected to be completed later this year that will be a key driver of growth for us in 2022.
Finally, the acquisition of PCR closed on April 30th and will begin to contribute to our consolidated results per.
Sylvania remains our largest market.
An anchor for our expanding northeast strategy.
In Maryland, the acquisition of H M. S began contributing to our sales as of May 3.
Note that our 2021 guidance does not contemplate any expansion of the Maryland assets, though as Jason noted we will soon begin on expansion of our cultivation and processing operations in Maryland. This expansion is expected to contribute to results beginning in early 2022.
In California, we will fully annualize the late 2020 expansion of our staple our cultivation facility and we will see continued growth at retail with the further ramp up in our fourth and fifth California stores in Berkeley, and Capitola, which opened in the second half of 2020.
We are also cautiously optimistic about some early indications of COVID-19 impact subsiding with some recent sales trends, we have observed with our California stores.
Finally in Canada with our optimized business, we expect to see positive contributions to both sales and EBITDA growth in 'twenty 1.
We converted from Canadian dollars for U S dollars as a reporting currency affected this quarter.
Also our work continues with preparing tariffs and to become a U S. Domestic filer with the SEC under U S. GAAP later this year.
In addition, we are preparing to meet the requirements necessary for our securities to trade on a major U S exchange if losses should change in the future.
To permit us to do so.
As a result of these strong growth drivers we are raising our guidance for 2021 net sales are expected to exceed 300 million U S dollars and adjusted EBITDA is expected to exceed $128 million U S dollars, leading to an expected full year EBIT margin of 43%.
Overall, we remain very excited about our recent financial performance and growth trajectory in 2021, and beyond and we look forward to providing progress updates in future quarters.
I'd now like to ask the operator to open the call for questions.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star 1 on your Touchtone phone you will hear iterate on prompt acknowledging other quest.
If you are using speaker phone please lift the handset before pressing any keys.
We do ask that you please limit yourself to 3 questions and May certainly re queue with any follow ups.
First question comes from Vivien Asa at Cowen. Please go ahead.
Hi, good morning.
Good morning.
Jason I was wondering if we could just start off with you providing an update on on your CEO search. Please thanks.
Sure absolutely so recruitment is.
It's still underway I have interviewed several good candidates, but we haven't found the right fit as of yet.
This remains a priority, but we don't feel any pressure to hire anybody on that.
Sort of shorten time table.
As you can see business is strong and the executive team has really stepped up across the board.
Many or most of the.
The operators that we actually are have been a major part of our success up until this point and they are continuing to.
To drive the business.
On a really strong and efficient way so we're continuing to look.
But we don't feel like there are any sort of shortened timetables for or that this is a higher drill them in any way we are going to what we're going on we're going to wait and find really somebody.
Somebody that we think is really sort of the perfect candidate or close to close to perfect as we can find.
Understood that's great. Thank you.
And then on either Jason or or Keith.
Did you guys quantify what sequential retail trends more on California, specifically, just trying to unpack how much of the total decline, but it was really just coming out of California in isolation.
Sure Keith.
Okay.
Sure Hi, Vivien.
Not sure about the sequential decline but.
And we don't necessarily break out specific store level data.
I was I would characterize California, as being stable and as I mentioned them in the prepared remarks actually in recent weeks over the last month or 2 we've actually been seeing some some signs of recovery is as commuters and and tourists and so forth and the situation broadly speak.
<unk> starts to improve.
Okay understood and last 1 for me please on.
In terms of the 3 new doors that you guys acquired any Pennsylvania can you kind of just dimensionalize the productivity of those stores relative to the 3 existing doors that you have in that market. Thanks.
Maybe this is a good time for Greg to want to jump in here, who runs on northeast operations.
Thank you everybody.
Pleasure.
JCR stores are actually on conforming just about equal to our other 3 are Potsdam stores in PS.
Pennsylvania, and where we're really bullish on our future potential there, especially once we get.
Synergies completely in place.
Really proud of the team.
<unk> and the accretive.
For creative venture debt.
Given us too and on Pennsylvania retail business.
Understood. Thank you so much.
Thank you next question comes from Matt Mcginley at Needham. Please go ahead.
Thank you for my question is on New Jersey can you help me understand that the type of revenue ramp that we should expect in that state I guess, primarily on the wholesale business from that from the first of the second quarter and for those facilities are largely ramping in the first quarter and you. It sounded like in your prepared remarks, you wouldn't really hit a full run rate until later in the year, but can you help us.
I understand that when we would hit kind of a steady state for revenues net and that business in new Jersey that sort of steady ramp with a bump up in the bigger on the back half or is that something that really doesn't hit normal until until 'twenty 2.
Keith you want to take that.
Sure. So hi, Matt you have that pretty much right and we were trying to in our prepared prepared remarks kind of signal that debt.
We'll be ramping through the first half Q1 of course in this quarter in Q2.
And then it would be.
Quarter by quarter really getting to cash.
And have a run rate level exiting the year, so it's going to be.
A pretty dramatic ramp, but concentrated in the back half of the year.
Got it and on the gross margin side that was a pretty impressive step up in gross margin rate and it sounded like that was primarily based on the efficiency increases youre getting out of Pennsylvania.
Making sure that nothing would happen in terms of the acquisitions with Maryland, and the dispensaries in Pennsylvania that would that would reduce that rate so thinking thinking it through to the second and third quarters. We would do you think it would be around that 65% rates for gross margin assuming any other variables on the business Don.
Impact that and drag it down.
Yeah. So the way to think about that is there'll be there'll be headwinds and tailwind based on business mix and Youre right.
Yes.
Sales stores as you know are typically below average, especially below our average given our concentration.
Brandon manufacturing mix as I mentioned.
But then we will continue the tail winds will be new Jersey, continuing to ramp at a very at a at an above average.
Margin and Pennsylvania also continuing.
To show productivity in cost per pound improvements. So that's kind of how we model on forecast things and net net.
We don't see taking any material step backwards.
Yeah.
Okay. Thank you very much.
Thank you.
Thank you next question comes from Pablo Swantek at Cantor Fitzgerald. Please go ahead.
Thank you can I ask just a first question regarding overall market trends that youre seeing in Pennsylvania, some companies that disclose numbers seem to point from for some softness either you know.
So 1 off issues in the first quarter regarding weather or just you know the market.
Reaching a certain level of worthy on at the same time, there is a lot more stores opening right. So I'm guessing revenue per store is being kept us from getting some cases can you just talk about that in general for.
For the state that we don't you know the shifts a day takes their bodies on entirely rely only on my own opinion. So just.
Just some color on Patrick advantage again, please thank you.
Sure I'm Pablo.
I think Greg this would be credit great question for you to answer.
Alright, Thanks Pablo.
We are seeing more stores open as primarily a wholesale operation that is good for US we are.
We're continuing to see growth in our retail stores.
It has slowed a little bit last year was just gangbusters on now as you can see for my numbers on growth in our retail stores venture incredible when you have come from war on I'll call. It normalized growth in our retail stores, but with the advent of additional stores our wholesale growth continues which is great.
Pennsylvania has been such a strong market with over 580000 patients at this point in time.
We see continued growth for that market and we still have about a third of retail stores able to open that haven't opened yet in the marketplace. So we are we expect that growth to continue.
And at that point, you don't see any softness at all on wholesale prices remain strong, but even going up can you comment on debt wholesale prices.
The power prices haven't dropped whatsoever somewhat non flower has come down very small amount.
But theres still been great strength in AI on the pricing in the market, especially.
Especially on comparative to other markets in the country.
Right.
I guess, Jason just a more general question, but regarding the contingence dig that cannot be osha 20 per cent does that affect in any way your ability to raise capital in the future or or if you want to do it with you raise you can just.
Adjusted for Germs with Jonathan can you talk about that in general Thank you.
Yes, sure Theres no theres no impact whatsoever whatsoever, we're not limited by.
Anything we wanted to do on the yes on the capital raising side.
Currently we have any plans to raise capital.
<unk> is a kind of a state does not.
Preclude us from doing anything on or we don't need we don't need permission or anything like that okay on there.
Very last 1 you know as we're beginning to see more M&A in the sector.
For <unk> types I suppose.
I know everyone talks about depth in key stage, but it seems that the assumption is that investors would also be for breath right being in more states and you know.
Right now most of the solutions 3 stage now for with Marilyn how are you thinking about that.
In terms of having more state in the portfolio versus our other motivator for you on it. Thank you that's it.
Sure.
We're going to continue along with our strategy, which has been to be.
Very selective in terms of adding additional states there are probably.
On states right now that we can go find accretive deals on.
Earnings accretive deals.
But they are not they're not all necessarily strategic so we really are just setting a higher bar for ourselves where it's.
Not only be an accretive deal, but something that is very strategic and position puts us in a position to.
To win so that's why we're.
Our view is we'd like to add 1 to 2 states over the next 12 months or so per.
Preferably.
The general vicinity of where our other locations.
Our because we think it actually is an advantage to have our people will be able to.
Getting a car and go over and see people and go see that goes to your stores in our facilities and things like that.
We're working on we're working on multiple deals on on that shrunk to potentially enter an additional state or 2 and then we are also looking at going deeper in the places where we are.
We're looking for more dispensaries.
In Pennsylvania, we're looking for dispensaries in Maryland.
Those were just the give us give us that.
Extra scale on that.
And those states that are that we will continue to be able to drive the strong the strong margin.
We're driving.
But overall Pablo I would say Ah.
We don't feel any pressure to have more have more breadth.
In terms of being and.
Having more pins on the map.
As you know we're much more focused on the on making sure that we are a top player in the states, where we where we play because we just we thank you for a more focused like I said it gives us a better chance of winning but it also makes us focus.
Our capex dollars.
And build more scale and those are limited and that limited number of states, where we are and therefore it gives us a better margins in the near term as you know as you can see from today's results, but even over the long term.
As these limited license states.
Get more competitive we think that there could get there could be the point, where pricing comes down to a certain price where a smaller subscale on operator can no longer turn a profit at that price and we would still be able to drive strong margins at that price. If we are if we got some of the best scale on the state.
Got it thank you.
Thank you.
Thank you next question comes from Ken Recti at ATB capital markets. Please go ahead.
Thank you and good morning.
Jason just with respect to Pennsylvania.
Turning to sort of flesh opex footprint at retail can you just speak to the path to sustained stores.
Whether it has on your expected will get more expensive the closer we get to a potential recreational legalization.
And really your visibility on that path for 15 does that sort of stayed largely unchanged is it improving just any insights you can provide on the.
The evolution there on the path to a current tax on the site for would be great. Thanks.
Sure sure absolutely. So we do we are currently trying to.
Find more and more stores as a as I mentioned, we have.
We have a few potential deals on on that front nothing thats far along enough for us to announce but we are seeing opportunities.
I don't think that I don't think that prices are.
Are going up or that there will be that there'll be going up.
In the near term.
We've actually started to.
I feel like we're seeing the opposite.
I think if I can back if I can pull back from Pennsylvania, maybe Massachusetts is even better example.
What's going on in these limited license states on the East Coast.
Because so many of them are price.
Practically all of them have caps on either dispensaries or cultivation canopy.
On the fact is that in a state like Massachusetts, which are which is.
A great state.
In the cannabis industry.
The fact is practically all of the other buyers are already tapped out in Massachusetts. If you look at the top 10.
Our market cap episodes I believe every single 1 of them is already capped out or right near the cap in Massachusetts other than terrorism.
We actually have seen a.
Debt opportunities for deals in Massachusetts, the prices are actually going down because they were simply.
Not enough other theres no buyers left.
That could that can pull off a 100 plus million dollar deal. So.
This applies to in Pennsylvania, as well, maybe the operators are already capped out at their at their dispensary cap.
NPA and therefore, we see prices.
Holding holding steady.
Got.
And.
Hopefully.
Going down as opposed to as opposed to going up.
Thank you and then just if I can just switch to Maryland.
Obviously, a market that people on it.
Spending more time looking ask on speaking to them can you just sort of.
Take us through to your mind, the appeal and where you went outside the appeal, having just closed that acquisition.
How you think about the urgency to your capacity expansion on you from taking it through year, but essentially your question for you more or less excited about the opportunity in Maryland. Now then you are free of 6 months, we got on how should we think about.
Your your sort of mature footprint on maturity and the state.
Sure.
I'd love to have Greg answer to this 1 because I know she is just so excited about Maryland.
That would be my pleasure Jason.
Thank you I on.
So.
I live in Maryland, which are which is why Jason throw it over to me.
Very excited about the Maryland opportunity.
I would say that Maryland.
As Jason mentioned, we believe very much in going deep before going wide and we think that Maryland is going to be just a fantastic state for us great synergies.
With or without Pennsylvania, and New Jersey assets as far as our capacity our people.
Yes.
The location as far as the opportunities and the similarity for the state.
For makeup.
Mix is et cetera. So we are I can say without any hesitation much more excited today now that is the actual versus theoretical.
We acquired a great team at HMS, and and Theyre doing a great job and we are we think our future expansion opportunities are on.
Really solid and that we can be.
On the top tier player here, just like we are in Pennsylvania, and New Jersey. So we're really excited about it.
Great opportunity.
Great. Thanks, so much I'll leave it day I get back in queue.
Thanks, Kevin.
Yeah.
The next question comes from Glenn Mattson of Ladenburg Thalmann. Please go ahead.
Hi, I'm curious Jason on your thoughts on just when.
When we get to you know where your best guess for as it stands today, where we get to adult Rec in New Jersey, I know Theres a lot of.
The state regulators want regulators want to get.
The medical market fully supplied and all of that so just your sense of like how long you know to.
To meet that requirement and what you feel isn't sense on on a direct.
General.
Sure I mean, we are we're going on to be assumption that flips over to Rick at some point before the end of the year.
It has not been directly on our revenues have not been included in our guidance, but where we're just assuming that it happens before the end of the year if it happens.
Sooner so staying on the fall then.
That'll be great for Greg for towers, and we are prepared to fully be able to fully supply our stores and we think that we will be able to supply the wholesale market as well. In addition to fully supplying those stores. So we are we will be ready, it's just a matter of when the.
When the whole program.
As a debt.
It gets kicked off.
Greg do you have anything that you'd like to add to that.
The only thing I would add Jason is as you know as we are now growing in both our greenhouse and our indoor facilities in New Jersey, we are able to to help supply the entire marketplace and we're hoping with the ads.
As Keith mentioned, that's where you really get to full production coming to Q3 bad debt were realized.
Allowing the medical program to be fully supply, which will help of course urban to the adult use market. So.
And I believe the other players in the marketplace I tried to do our part.
This program moving forward.
Idiot matter.
Our Oh, I'm really optimistic again.
Georgia as well.
Great. Thanks, that's helpful. Keith you mentioned on the margin side, obviously, great performance on a quarter.
You said that there were kind of pulls and give and takes going forward, but it seems like there's.
More benefit coming given that you know.
New Jersey ramps are that'll be better margin and as the Pennsylvania acquisition.
Comes into the fold.
Youll get good margin on that side in California is improving so in general.
Maybe can you just think about like what's the upper end of where margins could be say I don't know next year when when when all these assets are producing out there.
Highest level highest case.
Yeah, Hi, Glen.
I'll reiterate a little bit what I said earlier and just to make sure. So.
Like I said net net we don't expect any any negative impact material negative impacts going forward in the quarters.
I also wouldn't.
Model too.
Too much positive.
Continuation either so.
I would say, 65% is a very high level.
And.
And that's kind of with with the with the puts and takes like I mentioned earlier.
There may be some.
Movement, but but.
Roughly let's say stabilizing in the near term at that level and we expect the rest of the year really for.
From an EBIT standpoint.
To get more improvement from SG&A leverage as I mentioned in my prepared remarks.
And so I know that wasn't your question, but.
Or are there maybe less.
On the gross margin side side in the near term given.
Some of the mix impacts from like Casey are coming in.
Retail gross margins being lower than that average.
Great and then thanks for that 1 more would be just on the guidance. So you know.
<unk> raised guidance on it but then there's also a couple of acquisitions in there so.
If I just look at let's see like the Pennsylvania acquisition. I think you said you paid like a mid like $70 million and it was a mid single digit multiple which would imply something to the tune of like 10 ish million in EBITDA and so you know maybe more maybe less but that if you got 7 months out of that.
Business that would equate for most of the increase and then you also in Pennsylvania and other stuff. So maybe is there a little bit of conservatism, there or something else that I'm missing or maybe I'm not doing the math right. That's it for me. Thanks.
Yeah, Jason you want me to take that.
Sure.
Okay.
Yes, so just just to clarify there Glen so HMS was already in our guidance.
Okay, that's important to understand and then.
Yes, TCR is is a key driver of the change and I think your math is broadly correct.
And there are you know there are other moving parts here and there as we go through weeks and months, but that's largely.
The right takeaway.
Great. Thanks.
The next question comes from Andrea for Danielle at Stifel. GMP. Please go ahead.
Hi, good morning, Thanks for taking my questions and congrats on the quarter.
Thank you.
Just wanted to maybe talk about New Jersey following up earlier question.
And and and maybe more focused on your stores.
You know given in the past you've talked about the big change that you would expect.
And you know a switch to turning on Iraq is is just higher vertical integration and more sales going through your own stores.
With that in effect, then and you know your recent store opening in May.
Having been quite a large store.
Could you talk about you know how much torque should we kind of expect.
On your on your stores' productivity before it reaches full capacity.
Oh.
Sure in terms of a specific stores, where when we can get to full capacity.
That was the question.
In Jersey.
And yes, if I listen to where Youre right now.
Yeah, well first of all there's a there's certainly a huge amount of upside versus versus wherever you are at now, especially in maplewood burgers.
It's only been open for a for a couple of weeks.
But what I would say as we said you know this maplewood store.
Has we have.
The capability to have a 15 point of sales.
At that store, which are when we talk about high throughput a 15 15.
15 point of sales store is generally can can put can push through figure over 35 or $40 million.
And annualized revenue.
Obviously nowhere near that right now because we.
We just opened.
And our view is it would not hit those type of numbers under under medical but on direct we are you know.
Especially if we are 1 of the best free of some of the best supply dispensaries in the state.
On direct we think that that dose for the type of numbers that we can that we can achieve in the store.
<unk>.
On a store like Maplewood started.
Started the century as well will be a high throughput store in a very high traffic area of New Jersey. So we think that that is another 1 that clubs.
Figure 30, 40 plus million dollar.
Revenue potential pretty quickly.
Yeah.
Pretty impressive.
And then maybe following on on.
On M&A.
You talked about you know less less buyers in Pennsylvania to do large deals.
But you also talked about you know some some potential for tuck ins or smaller deals.
Do you have a preference 1 versus the other or is really you know you youre looking at you know all.
All potential acquisitions there.
And.
You know you mentioned pricing in Pennsylvania, but could you also maybe talk about more broadly with what youre seeing with pricing.
Especially given the pullback in the market in the in the last couple of months.
Yeah.
Sure. So you've made a pricing in terms of to buy assets right.
Yeah sure I'm clear.
Yeah as I mentioned, we've just been getting very excited to last for the last month or so.
<unk>.
Sort of where we've.
Come to the realization or it's become a reality that we had a theory.
That we could wait on on several of these attractive states because they had low a.
Low caps that we could wait and really pick our spot.
As I mentioned earlier, Massachusetts, I think is a good example of that the last 2 deals in Massachusetts.
On that progressively lower multiples of EBITDA I believe the last the last deal on Massachusetts announced about a month ago was a I think it was for in a half day 5 times current.
EBITDA and even lower number obviously for for next year.
And even that deal that that deal ended up taking out the last buyer out of the out of the top 10 Msas. So we're just seeing in states like Massachusetts on other ones, we're seeing really attractive assets.
That's where.
You know where these operators have put in the time and the sweat.
And you know, it's got a lift through some of the pain to get to the point, where they now have nicely profitable businesses that are actually many of them are actually already cash flow at this point and.
And we're just really excited because we can now step in and buy assets like that for mid single digits.
EBIT multiples and really sort of leapfrogged our way.
Right into right up near the near the top in those states. The other thing we really like about these limited license states is that we don't have to or at least the ones on the northeast is that there are not many dominant players because of the caps.
You know in Massachusetts, where you can only on.
3 rec dispensaries, 3 medical dispensaries, and a 100000 square feet of canopy, we don't have to worry that if we entered someplace like there like that that we'd be competing with a with a really entrench strong player on that owns 50% of the market just because it is not possible with desktops, so not to spend too much time talking about on mass.
Since I'm only using it as an example.
We think that the.
That type of situation.
Starting to play out and several other limited license extremely attractive states.
And that we're going to be able to we're going to be about sort of to get into those states.
At a much lower cost than the existing players or whatever it costs them to buy their way or organically.
Build it.
And not to wait for the cash flow.
We're excited that now we can enter enter there and immediately have cash flow.
And enter at a.
Very very.
Accretive multiples.
Thanks, and and and and just to follow on that do you think that.
You know smaller or larger acquisitions or more preferable or would you would you say that.
That both you know if the if the terms are right. Then if this if the strategy is right would be equally as attractive.
Yeah, I would say, yeah, I would say, they're equal as attractive as it depends on on.
On which they I mean, we do aim to we don't like to enter a market unless we think that we can be a top 3 player with them within the first year or so so that may relegate us too to some larger operators, but.
I think that <unk> is a good example, where we bought an operation that is not very large we bought it at a very attractive.
Mid single digit multiple of run rate EBITDA, but to a certain extent, we were getting that that EBITDA.
But on top of that we were getting a piece of paper on the license, which we can now take and transform into a much into a much larger asset. So we'll look at smaller assets. If we think that we can turn them into much larger assets.
I'll also just look at large assets if there are attractive.
Thanks for that I'll get back into queue. Congrats again.
Thank you.
Next question comes from Noel Atkinson Clarus. Please go ahead.
Hi, Good morning, guys. Congrats on a strong Q1 and thanks for taking our questions. This morning.
First off you mentioned in the remarks on the filings the rest split between wholesale and retail for sort of 72% wholesale I guess in Q1 on the rest of retail what do you think your 2021 guidance for represents in terms of wholesale and retail split.
Yeah.
Keith.
Yeah, I know I would say broadly speaking, it's going to remain in that in that range and in past quarters. I think just based on our filings it's been kind of that 68% to 72% range and it's going to depend on.
Whether or not there's any other M&A and so forth.
We're talking about.
Broadly speaking, it's going to stay on that range there.
Okay.
Can you talk at all about the performance.
Your second dispensary in New Jersey after the opening I know, it's only been a few days but.
Yeah.
Yeah.
I don't I don't think it's truly only been a truly only been a few days.
And I don't think for that I I don't know.
I don't even know the specific numbers, but.
That would not be something that would be a reader that we would share generally we don't give any sort of single store level.
Sales numbers.
Okay and then the status of your third store in New Jersey, where is it in terms of development process.
Zoning approval.
Would it be a similar size to your big story Maplewood.
Sure Greg you want to take that.
Yeah, we're finalizing all of the all of the promos right now and where our net store will be.
A little bit smaller, but still a nice sized store about 5000 square feet.
And.
Sorry on location and.
As stated we are expecting to be open.
Summer of this year.
Okay, great. That's it for me thanks.
Thank you. Your next question comes from Eric and Larry at Craig Hallum Capital. Please go ahead.
Great. Thanks, taking my questions. Congrats on the continued impressive profitability here a question for Greg.
P a M.
So cultivation operations, obviously continued to impress both from a profitability and market share perspective.
Greg can you help us understand how you think about the tradeoff between potency in quantity.
So we think moving more of a quantity game early phases.
And then more of a potency game as competition increases.
And so would love to hear your thinking of other layers competitive positioning from a quality and potency standpoint. Thanks.
Well, let me let me congratulate you on a really good question.
It's a topic that we talk about quite a bit internally as markets mature as what we've seen on the west coast on there.
I play a what we call a flight to quality.
And it was.
Turning out much more of a quantity.
Race than it was on quality rates to some extent.
Always focused on quality and we continue to do so.
And we have made some pretty significant yet.
Especially in our non flower production.
To continue the race to quality as you say potency as well so we're focused very much on potency.
On the flower and non flower as well as the diversity of the marketplace wants so it's not necessarily only high THC.
Sharp pains of course and they are just.
Overall.
Quality again I'll be on.
The product line and making sure we have a diverse product offering.
To really hit the market, where the market is today and where it's going not necessarily where it was so again, a really really good question.
Alright, great. Thanks, I appreciate the insight and interest of time I'll save my follow ups for offline. Thank you.
Thanks.
Thank you next question comes from Andrew Semple at Echelon. Please go ahead.
Hi, there and congrats on the results.
I just wanted to go back to the gross margins for the quarter I'm, just getting a sense that other Pennsylvania was the primary driver behind the quarter over quarter increase.
So on the gross margin level.
But I'm also wondering whether for sales into new Jersey had a material.
Impact on the gross margins if.
If you had any comments on that.
Yeah, Hi, Andrew.
It's both and you can think broadly speaking, maybe roughly half and half so half contribution from from Pennsylvania continued improvements and.
And in half from New Jersey.
Oh, Okay, that's great color I appreciate that.
And then looking at New Jersey in the months and quarters ahead.
So you're going to have to make decisions there with what you do with your production capacity in that market.
And how much you want to allocate your own stores on.
Do you have an early sense of what what kind of proportion of your own shelf space you'd like to reserve for your own branded products relative to third party products or is it still a little bit early to make that call.
Yeah.
Greg you answered that.
Yeah, Yeah. That's again, that's a great question a lot of it depends on what other growth.
Low processors are producing in the marketplace. So while we'd like to do is give our customers on our patients a variety of products. So that they are really you know again getting.
The medicine or the products that they want and need so depending on what is.
Being produced from others will help determine how much of our own product will be on the shelf, we want to make sure that we have a robust product offering if that means that we need to supply more.
That's great and we can do so if we on we can kind of spread it around and and supply the other.
That's right and and have supply on the other G pace then.
We will look at that so some of that won't really be determined on what happens in the index.
Let's call it.
6 months or so.
Understood. Thanks for taking my questions.
Yeah. The only the only thing I would add to that though is we believe that we can fully supply our stores.
And additionally supply the wholesale market.
Based upon the capacity that we have so that would be even if it ended up skewing much more towards us.
Needing to sell a larger percentage of her own products in our own stores, just because there's not enough supply of of others products.
We can still fully supply.
Our stores and have additional products on the wholesale market.
Absolutely. Thank you.
Thank you ladies and gentlemen that concludes today's question and answer session I will now turn the call back over to Jason for closing comments.
Thank you. So yes. Thank you everybody for joining our Q1 call. We look forward to our next call in August to report our <unk> results.
You very much.
Yeah.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
For the rest of your day.