Q1 2021 4Front Ventures Corp Earnings Call
[music].
Ventures first quarter 2021 earnings conference call at this time, all participants are in a listen only mode.
And the answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I would now like to turn the conference over to your host Mr. Andrew. Thank you you may begin.
Thank you operator, and welcome everyone to the forefront ventures earnings call for the first quarter 2021.
I'm joined today on the call about the entire forefront management team, we have Leo kind of maker of CEO President of Carl Sassano Jake.
Jake Wootten, our EVP of finance, Joe cellphone, CLO, and our interim CFO Pete Renard.
Before I begin I'm obligated to remind everyone that during the course of this conference call management may be making some forward looking statements that are based on current expectations and are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations.
These results are outlined in the risk factors section of the filings in our disclosure materials.
Any forward looking statements should be considered in light of these factors.
Please also note the safe harbor in the outlook. We present is as of today and management does not undertake any obligation to revise any forward looking statements in the future.
So with that of the way, let me give you a very quick overview of the call today, we have a lot to get.
True when were pretty excited to share some recent developments as our company enters the significant growth phase.
I'm going to start with reiterating our thesis and strategy.
Then I'm going to provide some color on our first quarter results and an update on the significant progress we've made in the business.
I'll, then hand, the call over to Leo who will go into a more detailed review of our operational trends along with highlighting some milestones we treat achieved in the quarter as we continue to build momentum across our business.
Conclude with Q&A session, where the entire management team will be available for any follow up.
So with that out of the way let me begin.
We have many new investors on the call that are newer to the forefront story. So I'll start again by outlining the forefront thesis and what we as investors are playing for.
I firmly believe that we are entering the golden age for the cannabis industry as the pace of state legalization accelerate and reform on the federal level of increasingly appears to be enough.
From a pure investment standpoint anticipated reforms in the banking launched the a game changer, leading the way the cost of capital coming down for the find it for <unk>.
With financing from money center banks and eventual accessed the U S exchanges and broad based institutional ownership in the industry.
The business fundamentals of the U S. Cannabis continues to be robust and appear to be strengthened what we're witnessing here's the emergence of the massive secular growth industry.
It's still very much in its nascent stages.
At forefront, we believe the sweet spot in the value chain in this industry is the low cost production and distribution of cannabis consumer packaged goods.
Of the past 6 years forefront facilities of established the dominant market position in Washington State with a full line of products.
Switch of distributed over 260 retail location.
In that state of.
Of our facilities of the number 1 edibles manufacturer and the number 2 flow power producers with overall number 2 market share in Washington, outperforming over 600 license holders and 1 of the most competitive cannabis markets in the world.
We did this while maintaining very attractive margins and profitability.
So our thesis as I always say, it's really simple.
The replicate in these trials.
And true production capabilities, and large and nascent recreational markets of Illinois, Massachusetts, Michigan, and California, and the all in we currently serve an addressable market of over 76 million people.
We're pleased to share today important development as we execute on the season.
The 1 we continue to see our maniacal focus on execution, taking hold and are busy.
Not only did we have a very strong top line momentum in Q1 that has carried into Q2, we have successfully set the table for the second half and beyond.
Our operations and construction team have done an incredible job of controlling everything that they can control.
As a result to more critical projects, our Commerce, California production Center, and Brookline, Massachusetts retail location are set to open imminently under budget and largely on time and almost every facet of our business, we are smarter and stronger than ever before.
And consequently of performed better than our core business that we projected secondly, our Q1.2021 system wide pro forma sales were 31.
$1.4 million, an increase of 26% sequentially over the fourth quarter of 2020.
All retail locations across the portfolio performed above our average.
The patients a trend that has continued into Q2.
Recreational sales in Massachusetts continue to build and we showed 30% sequential growth growth in the state.
In Illinois, we showed over a 100% sequential growth as our second location in Calumet City came out of the gate strong in December and has never looked back.
Q1 marked our third consecutive positive adjusted EBITDA quarter, posting $5.9 million and adjusted.
EBITDA of 19% adjusted margins well above our internal budget EBITDA margin in the quarter was negatively impacted by the ramp of our expanded growth facility in Illinois.
The tripling of the Illinois cultivation facilities flowering canopy was completed on time and under budget in Q4.
But the first part.
The risks from the expanded facility was not complete until April leading to a 1 time higher than expected average cost per gram in the quarter and.
In addition, the.
Mr. Lai of resulted in a disproportionate amount of lower margin third party wholesale sales in the quarter at our Illinois Dispensary. We believe this is onetime in nature and.
And subsequent to the quarter, we have already more than triple our Q1, Illinois harvest output through the first month of Q2 and.
And we expect the meaningful rebound in margins in Q2, as we implement more of our Washington practices, and our growing footprint or our balance sheet, leaving Q1 was in solid shape as of March.
31, we had approximately $18 million of cash and $46 million of related party long term debt, which doesn't come due until may 2024.
We're feeling terrific about our current liquidity position and access to reasonably priced project capital.
We anticipate the cost of capital in the industry to continue to come down with looming banking reform and increased investor interest in the cannabis industry.
Point number 5 circling back on my earlier comments.
Our operations.
<unk> and construction team have been phenomenal we are effectively on time and under budget with all of our expansion project, which is critical these product set the stage for future growth.
Leo will speak specifically to our imminent and exciting interest into the California market along with the anticipated opening of our third, Massachusetts retail location in June.
We also announced our plans in the quarter to exponentially expand our cultivation and manufacturing presence in Illinois.
We are bringing our scale cultivation and production capabilities to our 1 of 'twenty cultivation licenses in the state that allows for 210000 square feet of flowering canopy.
We plan to begin construction on this project in Q3 dollars 21 and are incredibly excited for the phase 1 to come online late next year with roughly 65000 square feet of flowering canopy and 70000 square feet of production.
So our thesis is proving out we are successfully introducing.
And the brands and products from Washington into new markets.
The feedback we've gotten from our customers in mass in Illinois has been fantastic and now we embark on our much anticipated entrance into California, the largest cannabis market in the world. We're incredibly pleased with how our business is performing setting us up for a step function operating leverage.
As we continue through 2021 and beyond.
So having set that stage I will now turn the call over to Leo got maker of our CEO, who will delve a bit deeper into our assets by state and provide some additional color on our near term and medium term plan Leo.
Thanks, Andrew.
Andrew did a terrific.
Job of updating you on the strength, we see in the industry and our business 2020 with the transformational year for our company, which was achieved through focus dedication and the hard work of all of our employees, we carried that momentum into the first quarter of this year and it's continued into Q2.
Little over a year since our board appointed me CEO because of my deep understanding of candidates business operations as well as my business building capabilities along with their desire for this to be an operator led company I have now brought that roll in of closer to that as we say internally is maniacally focused on execution doing what we say we're going.
We do.
Since March of last year, we've made tremendous progress of the company right sizing the cost structure streamlining our business and pushing deeper into our core states by leveraging the structural cost advantage of our facilities developed in Washington into the rest of our license portfolio.
Recall, our investment thesis, we believe the sweet spot for outsized value creation in the industry is really around the low cost production and distribution of cannabis consumer packaged goods.
Our facilities in Washington State are the number 1 edible manufacturer of number 2 producer of flower with an overall number to share in the state.
We outperform over 600 license competitors and possibly the most competitive cannabis market in the world. We have achieved this while maintaining very attractive margins and profitability.
We're replicating these tried and true production capabilities in the large and nascent recreational markets of Illinois, Massachusetts, Michigan and soon to be California. So the question is how is the thesis playing out for us so far.
Due to low cost of cultivation and manufacturing methodologies and again, our maniacal focus on execution, we have successfully and profitably scale products and brands from Washington in the Massachusetts and Illinois.
Let's start with Massachusetts, it's been 18 months since the opening of our cultivation facility and with the which of conception, we were able to institute of growing methodologies and the S&P developed over the years in Washington since our first crop in Q3.2019, we've experienced no sales harvest and demonstrated the annual yield of.
Well over 400 grams per square foot.
The required Georgetown facility, we continue to make improvements of the growing environment, including upgrades to the lighting, which have driven yields in excess of what we're accustomed to seeing in Washington.
Introduced all of our Washington brands into the Massachusetts market as well without exception.
The reception for our products has been fantastic and we expect to continue to build momentum as word of mouth spreads.
We've seen the brands, we brought the market pretty quickly take market share from the previous in house brands that were being sold out of Georgetown, which is of great sign and we continue to see the sales climate.
We've implemented our extraction methodologies, which enables consistent repeatable feedstock for all of our products and introduced our production and packaging methodologies, which greatly enhanced throughput and reduce labor as we move forward, we look to continuing momentum in Massachusetts as both are what's the in Georgetown facilities continue to ramp up.
Our third, Massachusetts, the retail location in Brooklyn is still expected to open for recreational sales in Q2.
We've had to contend with some minor permitting delays, but our team has done a fantastic job of pushing the project and controlling everything we can control again points to our maniacal focus on execution and we currently expect to be making our first sales in Q2 pending final CPUC approvals.
Our upgraded cultivation in Massachusetts ensures that we'll have plenty of inventory the hit the ground of Brook line running hard we're extremely excited about the story.
Washington continues to stay steady with improved top line growth as wholesale prices have rebounded from their lows in 2018.
Our facilities had a record quarter in the summer show in a big uptick in general in Washington across the board on flower and derivatives.
Pricing is holding steady and as volume has declined we have not had the drop pricing across the board on any of our products. So the net.
Extremely encouraging of great sign because usually coming into Q4 and outdoor harvest and leak into Q1, you start seeing a bit of a drop in flower pricing and the little bit of a slowdown in sales. We're extremely excited about the strength and everything points to it staying that way for now.
In Michigan, we are pleased with how our team navigated a very choppy supply chain and increased competition.
Downtown in however was not the same in 2020 as years past E. The closures downtown because the Covid and no University of Michigan students for most of the year.
Even though we don't have the same purchasing power of some of the other retailers in the state the relationships. The team has made over the past 8 years in business, we're able to carry us last year and beyond.
So despite seeing competition doubled since 2019, and having less product available to us we were still able to almost triple sales during our first full year of adult use.
And the Illinois, our south shore of emission retail reopened last July were back the revenue.
The numbers, we were seeing before the break in the last May is seeing solid growth month over month.
Further our current outgrow village facility continues to see progress our Washington facilities team took over leadership of this facility in <unk> growth in January 2020, and since that time, we've seen our yields declined from 290 grams per square foot to right around 375 grams per square foot pre expansion.
Our flower strains and brands have been very well received of the market along with our recently introduced flagship flower brands Funky Monkey and legend.
Expansion of the outgrowth was substantially complete on time and under budget, but as Andrew mentioned, our harvest in the expanded facility came on in April which has caused some 1 time disruption to our margins in the quarter.
With the expanded capacity on line, we not only expect the rebound in the company wide margins with increased wholesale revenue in Illinois, as we move through the second half of the year.
Also in more exciting as Andrew mentioned, we are preparing to commence construction of phase 1 of our build out of project Big Daddy later this year in Q3.
After the replicating our facilities best practices from Washington into both the Massachusetts, and our existing Illinois grow we have a tremendous amount of confidence that our scale of production techniques travel well and big data will be another significant and continued validation of our thesis. This facility will initially be comparable in size to our Washington.
<unk>, where our production numbers of consistently exceeded 350 grams per square foot.
We expect the yield that the big data to be in line with our more recent version of cultivation efficiencies, we've been seeing in Massachusetts, namely over 400 grams per square foot.
My team and I couldn't be more excited to bring our scale and low cost of cultivation and manufacturing into the state and get the opportunity to compete head to head with some of the bigger msos with our experienced playing in competitive markets.
Last in December 2020, our second, Illinois location opened for retail and calling the city, which is approximately 1 mile from the Indiana border.
The Grand opening occurred on December 15th 2020, and the results of an absolutely fantastic calendar. It has quickly become our second biggest revenue dispensary behind Georgetown and the momentum in Q2 has been amazing.
In California, it's coming up on Showtime the Companys fully funded state of the art 170000 square foot manufacturing only facility and commerce will be operational in Q2 of this year. We believe this is the largest cannabis processing facility in the world, which we know will become more efficient by a fab.
After of 10, then our Washington processing facility.
We're incredibly confident the commerce will soon become the premier of multi product manufacturer in the country with its unprecedented scale efficiencies and automation.
The Companys first suite of products will include edibles, tinctures capsules and introduce the roads, including our embargoes pebbles Shui of high burst of <unk> and <unk> brands.
This facility will have unprecedented automation and low cost production capabilities, along with the white label and private label opportunities.
California is the state we're extremely excited about for multiple reasons and the facility here was something that was planned to attack the market at scale and with automation thats far and above beyond what we've seen in the industry and across our portfolio in general.
Our distribution and go to market strategies baked pardon the pun and we're chomping at the bit.
The huge project for us has come into fruition and the partnership conversations we're having on the daily basis to fully leverage the scale of the facility have been incredibly excited about the future.
In that vein, we signed an agreement with novice of top 3 distributor of cannabis products in California, covering more than 750 dispensaries on a monthly basis.
We can't wait to the announced the commencement of operations in Commerce and look forward to the first edible to ensure the vape products hitting in California of retail shelves in the coming weeks.
In terms of our CBD business, we're making some progress, but still not declaring victory on the turnaround in this business.
The team did a great job of cutting expenses, even further and putting type parameters in place with our new marketing vendor of.
The business is cash flowing and we're monitoring it closely as we continue to make incremental improvements in revenues.
Before I conclude I wanted to thank our entire storefront team for their incredible efforts of commitment to making our company of success.
Our president of Carlos <unk>, and COO, Joe Feldman have been invaluable to me driving the business and making sure that all important details are taken care of as we positioned forefront for accelerating growth.
Andrew <unk> and EVP of finance Jake moving.
Having won several half from the finance the business development and capital market side and it served as a great complement to this operations focus CEO and finally I'd like to thank our CFO, Pete <unk>, who has come in on an interim basis. It can be of seen dramatic improvement in the timeliness of our financial reporting systems.
As the company, we're committed to ensuring our backup house is exemplary as all of our front of the house.
So consistent with our marker of my net excuse me of my <unk> focus on execution, we've set of operational Bogies and are knocking them down.
A really hard work in 2020 is beautifully set the table for a strong 21 and I'm pleased to report that our strong business momentum has continued through the second quarters. As we finished Q2, we're excited to add the this momentum with the opening of our Brookline location and turning on the project and Commerce.
We remain very comfortable with our previous guidance of system wide pro forma revenues of 170% of $180 million and adjusted EBITDA of 40% to $50 million. We anticipate these numbers could have an upward bias as we move through the year.
With the projects falling into place. It also seems a good time to remind investors what we're planning for we believe if we eat only what's on our license plate today.
We have at least the $650 million revenue opportunity $250 million adjusted EBITDA opportunity on our hands.
We have a desire to take our scalable efficiencies and go deeper into the states we have.
With that I'll now turn the call over to the operator to open the lines for Q&A.
Thank you we will now be conducting a question and answer session. If you would like to ask the question. Please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You May Press Star 2 if you would like to remove your question from the queue.
Its been using speaker equipment, it may be necessary to pick up your handset before pressing the star Q1 moment. Please while we poll for questions.
Thank you. Our first question comes from Neal Gilmer with Haywood Securities. Please proceed with your question.
<unk>, thanks for joining us on the Canadian holiday here.
Good afternoon.
The 2 and congrats on the quarter.
Even so it is getting your holiday of next Monday so.
I understand.
Maybe I'd start with 26% quarter over quarter growth sort of I would say.
Shipping some of your peers.
Was that largely driven through that I guess, not 100% I think you said growth in Illinois.
Or.
We felt that you just sort of outperformed across most of your state markets.
Congratulations I guess somebody appears of the reported so far some of our Q1 numbers.
Yeah, I'll hand, the hand, the call over to Jake Wooton day answer that 1.
Yes, no I think your instincts are correct. That's exemplary performance from our Calumet City Dispensary, which opened in mid June as Neal alluded to however, there is also some incremental gains in our Massachusetts facilities as well Washington was was the.
Kind of consistent with what it typically has been for the last few quarters and Michigan as well NPL ratios. The same so it's largely the Illinois dispensary openings and then some incremental gains in our Massachusetts facilities. Okay. Thanks Jake.
And this might be towards the new again, but just on the gross.
So the margins looked pretty solid in the quarter and then if I understand the comments.
With respect to Illinois, and the the ramp up of production, they're having an impact on cost per Gram fair.
Fair to assume that normalized.
And the slightly higher adjusted gross margins in the the second part of that question would be as you bring on.
California operation will that have a again of short term impact.
On margins potentially just sort of absorbed that and share portfolio.
Yes, no great question without getting into too too detailed specifics. We do believe there were a few hundred basis points that could have been had in the quarter with respect to gross margin had our illinois facilities than the.
<unk> been able to harvest in the quarter and get some of that product and true through the Calumet City expansion.
So that's with respect to that question in terms of California, We're currently expecting our California margins to be relatively in line.
With with what we're currently doing in our other states. So no material changes as we look to roll of California online in Q2 and Q3.
Okay, and then final 1 for me and then I'll pass the line for questions would be just sort of if I take a look at the midpoint.
Of the guidance on both revenue.
The new and EBIT I get to sort of of between 25% to 26% EBITDA margin.
19% this quarter and obviously with some of those impacted I guess.
It seems to me that the bias would be towards the upside.
Of that margin range, just as you progressed through the year and half of those efficiencies come online.
Is that sort of.
The Safeway to say perspective to have the move into the second half of the year.
Yes, Neil I think that.
Yes, Leo sort of said it best we're really comfortable with where we are from a guidance standpoint and the.
We do think of it theres potential for of upward bias as we move throughout the year.
Alright, well, thanks very much I appreciate the questions. Thank you ma'am.
Thanks.
Thank you. Our next question comes from Graeme Kreindler with 8 capital. Please proceed with your question Hey Grant.
Andrew Hi, guys. Thanks for taking my questions the SaaS kind.
No.
I've got 2 follow ups.
And regarding the previous set of questions here and I just wanted to start on the gross margin side of things can you disclose what the gross margin looks like on a system wide basis, as we try and assess both both the revenue in the adjusted EBITDA of just to bring that full circle.
Jake.
You want to hop in there yes.
Yes of course, we don't disclose it on a system wide basis as you know.
All of the Washington financials, we cannot.
Solid 8 them under U S GAAP.
So if you want to look at the financials on a standalone basis, excluding the Washington Operation you can remove the realistic painting.
Net income line from revenue and simply take a gross profit against our revenue from sale of goods to kind of get you an understanding of what the margin is for the the THC.
And I should say the deterioration of business as well, but the out of the operations that we directly operate 1 and Ken consolidated from a financial standpoint, Okay understood and then with respect to discussing the potential for upward bias on the guidance.
The reconciled.
Putting all of the comments made on the call and in the Q&A that would lead me to believe that there's really a lot of the average that could be found on the gross margin side of things.
But putting aside any potential shift of acceleration of trends that we might see that impact the top line, but is the expectation.
Spectation that from the the fixed cost expense side of things Thats going to remain relatively flat throughout the year that is that a fair assumption.
I think that is a fair assumption and I think what Youre also seeing.
As a greater proportion of our sales moving through the second half of the year coming from vertically integrated operation because we opened our brookline location and as Calumet City continues to to range got it understood and then my last question here, just as you talked about the capital position and with $18 million of cash.
And a lot of the a lot of of the facility of these reach.
And the point, where they are more efficient or being commissioned in Q2 here what is the capex balance look like for the remainder of the year.
And if you could potentially provide it by what project that's being dedicated to that would be appreciated. Thank you very much.
Yes.
Take that 1 as well, where we stand as of today as Andrew mentioned, we left the quarter with just under $18 million in cash in the balance sheet.
Where we sit today, we have about $2.5 million of Capex remaining for the year plus or minus a couple of hundred thousand for maintenance capex of projects horizon, but you're largely looking at that is $2 million of that being spent in the commerce facility and then $5 million being spent in the <unk> and the completion of the Brookline location and the construction is largely there.
Just simple and catching up of those out of those open balances. Okay understood. That's it for me. Thank you very much and congrats on the quarter. Thanks.
Graham.
Thank you. Our next question comes from Eric Day, Lower Laura here with Craig Hallum Capital Group. Please proceed with your question.
Eric how are you doing thanks, taking my question guys I am good how are you Andrew thanks for listening the.
Absolutely.
So congrats on the Navy its agreement in California.
Getting to have that distribution with such large capacity coming online shorten the hearing ecommerce.
<unk> by the White labeling comments I'm wondering if you could just expand a bit on.
Sort of the market for white labeling opportunities there.
How far along you guys are in with any discussions if any.
Any sort of comment on on that opportunity there and how we should be thinking about it. Thanks.
So I am going to turn the Leo.
Jochen can can answer that 1 sure I'll give you my first crack and Joe please fill in whatever I Miss here.
It's a great question getting our own brands and products onto the shelf of definitely priority number 1 for us.
But as we take a look at what's going on in the market and as we continue to have conversations with them competitors in front of Lake, we see that Theres, a large opportunity for white label and private label in terms of there not being enough processing capacity on line to handle the bulk orders.
We're also seeing opportunity and interest from big retail chains, and having their own private label.
And they're having trouble finding of 1 stop shop that can produce them a variety of items in multiple skus deliver on time and deliver consistently in our facility is purpose built to make stuff like that happens so.
As we go along and entertain different kinds of conversations.
Something that we're open to and something that we're definitely set up and ready for it.
Okay.
That sounds very exciting.
Switching gears over to Massachusetts.
Could you talk about the revenue split between the first party and third party brands within your Massachusetts retail stores.
I think you had a comment of your brands taking share there and I was just wondering.
What your current split is in.
If you have the production capacity to sort.
The maintain that split with Brookline opening shortly here.
I guess just in general any comments on how you sort of think of that ideal mix between first and third party brands would be great. Thanks.
Yeah, I think that's a good 1 for Joe fell from our CLO.
Hey, Eric.
Sure. So right now the mix is about 90% of our retail sales.
Our our products.
We have.
And sales of the retail level.
The increase we have the capacity to support the amount of stay increase and that of course takes into account book line opening right.
And it is expect that 90% ratio is expected to kind of carryover of Brookline as well.
The we are.
Continue to receive inbound requests on a weekly basis.
For wholesale and <unk>.
2 other stores, that's where we're maybe being a little bit more selective.
No issue of supply in our own stores, but we're going to just keep expanding our wholesale footprint and Massachusetts over the coming quarters.
Great appreciate the color. Thanks.
Thank you. Our next question comes from Dominic <unk> with <unk>. Please proceed with your question Hey, there.
How are you.
Hugh.
Good how are you.
Great that new voices on the call. Thanks for joining the top line.
Thank you. So I just had a quick question about the E Commerce, California facility.
How how are you guys going to be able to manage the had 10 times the was it the capacity or efficiency of the current Washington planet. They are about the same size.
Go ahead Leo.
Sure.
Referring to the size of the facility.
Yeah.
The Washington facility is right around 40000 square feet in the commerce facilities of 170000 square feet.
Little bit of of different in size.
Okay.
But mainly it's automation and efficiency.
We've put in automation thats far and beyond anything we have in Washington, and really far and beyond anything we've seen in the industry to date.
Those efficiencies automation and size combined allow us for that 10 ex capacity.
Gotcha. Thank you.
And maybe maybe it makes sense to sort of sort of hit of anecdotally on.
Pick of SKU like of Mama, what what the production out of our Washington.
Our Washington facility is in.
<unk>.
But the delta would be in terms of output at of California, If it were running on the shift.
Sure I think of marble or just any edible in general is a good 1 to make because of the edible machinery that we've put in ecommerce is the.
Our machinery that we're most proud of and that's the most highly automated.
So in Washington, and the single shift we have 30 people working in the kitchen that can produce.
About 3500 finished 10 pack of edibles.
And that same single shifts the machinery and commerce with 5 people working the line can produce 30% to 35000 just finished 10 packs.
Whether that's a mark of hard.
Hard candy or of chewy, just any edible that we produce.
Yeah.
Thank you.
Thank you. Thank you.
Okay.
There are no further questions at this time.
I would like to turn the floor back over to Leo <unk> for any closing comments.
Thanks, just wanted to thank everyone for their continued support and for joining us on today's call have a great day.
This concludes today's conference you may disconnect your lines at this time. Thank you.
For your participation have a wonderful evening.
Yeah.
Okay.