Q4 2021 Green Thumb Industries Inc Earnings Call
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Good afternoon, and welcome to Green Thumbs fourth quarter 2021 earnings conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the conclusion of formal remarks.
During the question and answer session, we would ask for a limit for one question and one follow up question per person as a reminder, a live audio webcast of all the call is available on the Investor Relations section of Green tons website and will be archived for replay I would like to remind everyone that today's call is being recorded.
I will turn the call over to Grace body Corporate Communications. Please go ahead.
Thanks, Anthony Good morning, and welcome to Green <unk> fourth quarter 2021 earnings.
I'm here today, with founder and CEO of Banco Blur, and Chief Financial Officer, Anthony Georgiadis.
Today's discussion and responses to 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 in the earnings press release issued today, along with our reports filed with the United States secure.
<unk> and Exchange Commission and Canadian Securities regulators, including the annual report filed on Form 10-K , which we expect to file later today.
This report along with today's earnings release can be found under the investors section of our website.
Greenbaum 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.
The discussion in Green Dot will refer to non-GAAP financial measures, including EBITDA and adjusted operating EBITDA, a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is included in our earnings press release, and SEC and SEDAR filings. Please note all financial information is provided in U S.
Dollars unless otherwise indicated.
Thanks, everyone and now here's Ben.
Thank you Chris Good morning, everyone and thank you for joining our fourth quarter and year end 2021 earnings call two.
2021 was a great year for Green thumb, our team's strong execution delivered results we are proud of.
For the full year revenue grew 61% to 894 million and GAAP net income more than quadrupled to $75 million.
The increased scale and operating leverage drove adjusted EBITDA growth of 71% to $308 million.
Interestingly, we committed over $200 million in Capex to invest ahead of the demand curve in the U S and by state and we can underwrite.
We delivered our sixth consecutive quarter of positive GAAP net income and eighth consecutive quarter of positive cash flow from operations.
But beyond the numbers, we are grateful to our team our customers and our communities who supported US along the way and we are and we are all even more excited about the future.
It can be difficult to avoid the noise and Kevin This plenty of Wearables and dead ends of noisy chatter I believe we have done an okay job filtering out that noise.
<unk> on where the puck is going and studying the tremendous potential of the great American growth story.
The growth trajectory may not be linear but over the long term, we are quite confident that we'll be up and to the right.
The timing of the rollout of adult use in various states is quite difficult to predict when it happens we are confident that the demand is real.
While no company is immune to the competitive pricing, we agree with them have focused on premium candidates and developing brands that are in high demand and less prone to pricing pressure.
The same time investing in scale production of certain items that will drive down the marginal cost per unit.
As we've been saying for quite a while our long term adjusted EBITDA margin goal of more than 30% remains intact.
It is worth noting that some states sales trends vary vary quite a bit month to month and that is not surprising in this emerging industry given what's going on so while Illinois saw sales volumes decreased in January December was a record month for the full year 2021 total sales grew 67% to $1 8 billion year over year.
Sure.
Illinois law.
Overall demand remains healthy, but the Illinois market is being artificially caps by the lack of progress in Springfield issues, social equity licenses and diversify the ownership base in this space away from what is really a white dominated group of men.
All of that was for Illinois, and social equity one we think the constructive conversations with the folks empowered to resolve the issue would help.
Illinois will be a blueprint for how not to achieve any equity or not.
Not to let anybody black or brown into the industry.
This is actually quite a good thing in our opinion.
I believe we need to create a culture, where it's okay to meet the state's but it's unallocated water from them and so we're seeing other states with equity permissions and their candidates was steady, Illinois as a cautionary tale. So we can all learn and we can all get better together.
There's a lot of discussion about cannabis reforms and new laws at the federal level.
While the market may not be waiting with bated, while the market may be waiting with bated breath, we at green thumb or not.
We think we are in an optimal position to take advantage of the changes that seem inevitable.
But I would repeat what I've said before we operate our business without the need for federal change.
As you can see despite a wonky 280, <unk> structure, the business was able to generate over $132 million of cash flow from operations and over $75 million of GAAP net income.
That's about 33 a share.
Until then we are busy executing a plan that puts green thumb and positioned to win based on what we know now not what may or may not happen sometime in the future.
And the core thing we know now is the American consumer is choosing cannabis for well be.
So there are many hurdles in these emerging industries, especially those in decentralized regulatory structures. So our plan remains very simple not easy we want to execute the business plan to focus on the consumer and the product.
Everything we've accomplished in 2021 was specifically designed to build long term value for all of our stakeholders.
Now point out some of the major achievements in 2021 that reflect our enter open scale strategy has really been our north star since inception.
So starting with enter.
We entered three new states in 2021, Virginia, Rhode Island and Minnesota.
We entered Virginia through our acquisition of Dharma in July when we acquired a production facility in one retail store.
We've opened three additional retail locations and we continue to bolster our position both on retail and production ahead of adult use sales in 2024, maybe sooner.
Rhode Island while.
While the smallest state by area is actually the second most densely populated after new Jersey, we acquired one of the three available state licenses in August , which gave us a medical dispensaries and a cultivation facility.
And most recently in December we're Super excited as we entered Minnesota through our acquisition of <unk> industries, which is one of only two licensed cultivators and the Minnesota candidates market and as you know middle Southern Colorado have approximately the same population of $5 7 million people with this transaction we added five opened medical dispensaries.
And a large cultivation production facility.
Due to some of the details on the licensing and the medical program, Minnesota 1 billion Underserve State and we believe we can expand our capabilities to provide patients with greater access to wellbeing through cannabis.
In fact this week maybe today the first legal sales of flower are beginning and our Minnesota stores are proud of our several strains of flower to patients for the first time ever.
Having done this a few times I would encourage patients or the patients as the market begins to accelerate we believe tomorrow it will only get better.
With Minnesota, we expanded our footprint to 15 states and we love our 15 state market, especially considering that our cannabis operations now serve over 50% of the U S adult population.
Furthermore, several of our states, which is really important to note, Virginia, New York, New Jersey, and Connecticut have all passed adult use and it's on the near term medium term horizon.
Eric brings them, we really like where our chips are on the board.
The open part of our strategy 2021, we've made a lot of progress opening new stores, we added 22 stores to the family.
Opened 10 and acquired 12 in various deals I'll walk through a few we ended the year with a store count of 73 and as of today sits at 76.
As always when it comes to new store Rollouts, we undergo rigorous due diligence process, which includes determining the best use of capital to achieve the highest returns we opened new stores in Nevada Reno.
Third store in New Jersey in Bloomfield encourage you all to come through soon.
And an additional store in Pennsylvania with rise Warminster.
In Massachusetts, a combination of acquisition and new store openings, we opened five new stores for a total of six three adult use and three medical and we're excited about the most recent store.
Chelsea just outside of Boston, which gives us a unique six store footprint in the Commonwealth.
We have four locations in Virginia.
Two of our stores and save up in Abington in February we opened two more price christiansburg and Roz Lynchburg.
And in Illinois, we expanded our ryzen underlines door to enhance our guest experience with the onsite consumption lounge in private Smoky XE. We also encourage all of you have you're in Chicago is close to all Airbnb us make a reservation, we'd love to welcome you out there major hats off to our retail team for an extraordinarily productive year.
And then we look at the third part of the business plan scale.
Mission of our company for sustainable profitable growth, we must understand and operate with scale.
I'm scaling retail locations that also requires investments in building the infrastructure to support growth, we have been building expanding and improving several production cultivation facilities in places like Illinois, Ohio, Massachusetts, New York, New Jersey, Minnesota, Rhode Island, and Virginia.
That's where the Capex is going that you see will be spent.
Our end game is not only to stay ahead of the demand curve, especially in those states that passed adult use legislation, but it is also to produce the highest quality and safest cannabis experiences for our consumers.
And all of these data must be connected in order to achieve our ultimate goal building brands at scale to satisfy the American consumers growing demand for wellbeing through high quality safe and reliable cannabis products.
We're very proud of our family of products and the early consumer relationships being formed with those brands.
Adam Incredibles dog walkers vivo, Dr. Solomon's and now <unk> had the brand cache needed to build what we would like to see the scale. We have built combined with the information that we have developed should set us up to make high probability well informed decisions and while this may sound ambitious.
Each day I reminded of the power of that special consumer connection with the brand that truly makes all of this possible.
And as you all know listening to this call government space cannabis is a complex business, but <unk>.
Assure you can count on us to thoughtfully execute our strategy that has been working since we started this incredible journey, we've accomplished a lot in the short period of time, but I truly believe this is just the beginning.
A lot of opportunity ahead.
But we will take it in chunks more bikes that we can digest that we can execute against wood.
We like having the Optionality that comes with positive free cash flow after tax and a strong balance sheet.
Growth, but not for growth sake, we're building green thumb to prosper over the long term so that all of our many stakeholders may also prosper.
With that turn the call over to Anthony for his financial review.
Thanks, Dan and good morning, everyone. Thank you for listening.
As Jeff turned the company closed out a strong 2021 generating $894 million of topline net revenue and 308 million of adjusted operating EBITDA.
It's helping to think how far we've come since going public in 2018, a year in which we generated $62 million of net revenue and $22 million of adjusted operating EBITDA.
In just three years, our team has been able to drive current monthly financial performance that now exceeds a results for all of 2018.
Other highlights from 2021 include the following.
Year over year revenue growth of over 60%.
Gross margins of approximately 55%.
Adjusted EBITDA margins in excess of 34%.
This closed M&A transactions and entry into the Virginia, Rhode Island, Minnesota markets.
Net teen growth of approximately 500 team members.
And 128 million in cash taxes paid to our largest financial partner the U S government.
For those of you that Red office annual letter. This weekend. This comes out to approximately 350000 in cash taxes per day.
Said differently the team had a hell of a year and our 2021 gross capex spend of $229 million set us up for 2022 and beyond.
Turning to the fourth quarter, the company posted $244 million of top line net revenue and $76 million of adjusted operating EBITDA.
Total net revenue increased 4% over Q3 with gross CPG revenue growing 3% and gross retail revenue growing 8%.
Prior to accounting for intercompany revenue. This left our gross CPG to retail revenue breakdown at 42%, 58%, respectively about flat with last quarter.
Consistent with previous periods and despite some headwinds experienced during the quarter, we attribute our topline growth as solid execution high quality differentiated products and continued strong demand within our respective markets.
On the profitability front the company generated gross margins of approximately 53% a 260 basis point decline over Q3.
The dip in gross margins was primarily attributable to moderate pricing pressure experienced on both the CPG and retail sides of our business.
At no point with the management team assumed that our historical gross margin performance was repeatable into perpetuity.
However, we remain confident that our scale diversified market base and focus on premium products will help support our efforts in keeping this critical metrics at or above 50%.
On the SG&A side, excluding depreciation amortization, and one time transaction costs and stock based comp normalized operating costs approximated $57 million.
$5 million increase over the 52 million incurred in Q3 <unk>.
The lions share of this quarter over quarter revenue quarter over quarter increase is both payroll and marketing related.
Principally reflecting our team expansion to close to 4000 members.
In 2022 and will continue to closely monitor our overall SG&A spend relative to our top line growth and margin performance with the goal of maintaining gross margins.
<unk> operating EBITDA margins at or above, 50% and 30% respectively.
Other expense for the quarter approximated $4 million, which primarily reflects noncash gains associated with our investment portfolio as well as interest expense from our senior debt facility.
Net of these expenses the company generated $22 8 million and net income or <unk> <unk> per share our sixth consecutive quarter of positive earnings per share for the business.
In addition, we generated adjusted operating EBITDA of $76 million or 31% of revenue.
Moving on to our balance sheet and cash flows we ended the year with approximately $230 million of cash during the quarter Green Dot made healthy tax payments Stockel, Sam and we invested over $75 million in gross capex, when including the spend associated with our sale leasebacks.
On our last call I communicated our plan to increase.
Our best in a number of key markets that we believe will help drive the next phase of growth for Green Dot.
Our balance sheet and positive cash flow from operations provides us substantial financial flexibility, we remain bullish on our uses of capital and the cash on cash returns. We can generate in this next phase of prohibition to point out.
As we look ahead in 2022 I anticipate repeating the following same themes that you've heard previously.
The star of the team is the team.
Taste pursue per.
<unk>.
With the consumer in mind every step of the way.
And embrace our role and responsibility within the industry to continue to chip away at the wallet prohibition that has caused our country and its constituents countless lives.
And opportunity.
We hope you and your families stay safe during these uncertain times and hope you all are as excited as we are for what's to come.
Back to you then.
Thanks Anthony.
Super.
Alright.
Yes, 2021 was indeed, a productive and busy year.
Accomplished a lot delivering strong results and set ourselves up well for the future.
Financially, we're comfortable shape with positive cash flow at over $200 million in cash on the balance sheet.
I'm proud that we earned the reputation for thoughtfully allocating capital for focusing on strong execution and most importantly for doing what we say we're going to do.
I'm also proud of our team's commitment to our core principles.
Year to a standard of excellence that elevates, a company's leadership position in an emerging industry and.
At a brand new frontier is very important for us to stay grounded and to stay humble.
Giving back has been an important part of our mission since the beginning and with every new store opening we donate first day profits to local organizations, who are making a positive impact on their communities.
We also believe it is our responsibility to help fix some of the problems created by the war on drugs.
Today, there are approximately 40000 Americans still incarcerated for marijuana offenses 40000.
Given the wide legalization of cannabis the irony is beyond crew.
We strongly believe in the plant's potential to improve well being which is important work when considering an every year.
More than 95000 Americans die from alcohol abuse, and another 100000 Americans die from opioid overdose.
Those numbers are staggering to us.
Social equity is also a very important concept for us, especially in the cannabis business. Our leap program in Illinois was very successful in helping individuals applied for social equity licenses.
We recently launched the SR program, Connecticut, and partnership with the <unk> ACP, Greater New Haven, and percentage cederberg to promote social equity applicants with the central knowledge about how to apply for a cannabis licenses in Connecticut and tips for operating a successful canvas business.
I think this is incredibly value add as we think the next chapter for candidates in the U S can be about new wealth creation.
Good grief or line of Canada's products dedicated to creating opportunities for marginalized communities impacted by the war on drugs.
<unk> to support nonprofit organizations in 2021 Green Dot provided grants to three nonprofit organizations. So it's not a good green Grant program each organization fit one of good Green's core principles, which are education employment and expunged.
And Theyre doing amazing work to create opportunity unchanged and black and Brown communities. We encourage you to check them out on the website and get involved we are currently in our second round of Grantmaking qualified applicants. This work we do in our communities is part of our DNA and really inspires passion throughout our organization.
I believe our commitment to the communities, we serve positions us to attract top talent aligned with our core principles.
With that in mind, we're very pleased to welcome during the quarter I think.
Welcome to Lori as she recently joined the board of Directors Dori is currently the president and CEO of YMCA of Metropolitan Chicago at a lifelong advocate of bringing community leaders together to promote social equity and lasting change welcomed Lori I'm excited you are here and we're truly excited you are on the board.
I think a little bit back I would be remiss not to mention that our hearts and hope to go out to the brave people in Ukraine.
We're advocating and justice has always been core to our mission and our values as both painful at alarming to witness Russia's progression progression towards its neighbor sovereign state, but I think it would be more on just the one we're watching happen along with the whole world, we are watching and praying for a peaceful resolution.
Finally.
Back to the Us and Canada.
As I've said many times before we are still in the early innings of this great American Canada's growth story.
Legal channel this market is already a $24 billion industry.
And we actually believe the market can more than triple over the next decade.
We think it's still day, one for cannabis, it's definitely day, one for Green thumb and the best is yet to come so stay tuned with that Andy and I will welcome any and all of your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you're using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
We ask for a limit of one question and one follow up question per person.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question comes from Vivien <unk> with Cowen and co. You May now go ahead.
Hi, good morning.
Okay.
So my question is for Anthony Thank you very much for the context around your aspirations to hold gross margins.
At or above 50% as well as.
The adjusted EBITDA margin at or above 30%, but just looking back to the sequential degradation that you saw in gross margin in particular.
In the fourth quarter I was wondering if you could just unpack that a little bit is it product mix geographic mix a combination if you could just.
Maybe offer a gross margin bridge of some kind that would be really helpful. Thank you.
Sure Vivien.
Excellent question so.
Let's zoom out a little bit.
Obviously throughout kind of throughout the year from each quarter, we saw.
Little bit of kind of growth in the gross margin line.
And in the fourth quarter, what I explained in my prepared remarks that we starting to see some some price settling that really rolled through both the retail and CPG portions of the business.
Really the pricing was probably the biggest driver in terms of the quarter over quarter decline that we saw.
Historically gross margins on the retail side of the business remained relatively consistent we did see some market kind of aberration in the fourth quarter and then obviously on the wholesale side of the business.
Given the <unk> that we have within within most of the markets that we operate in we saw a similar kind of impact there. So.
There were some other things that kind of roll through that line.
That's typical on a quarterly basis, there is going to be a little bit of noise, but just zooming out really the biggest driver was just some of the price settling that we saw a few of the markets.
Thank you.
Our next question is coming from Camilo Lyon with BTG you May now go ahead.
Thank you and congrats on just a.
A remarkable amount of consistency that youre, putting out quarter to quarter.
<unk>.
Following up on the last question on gross margin.
Anthony you talked about some states showing that that price compression.
Can you tell us what states that is most.
Most impactful on the on the gross margin and how do you think about.
The levers that you have at your disposal to.
Going to alleviate those pricing pressures is it.
From a greater focus on some of the other key products and more of your premium and fly.
Flower getting into market is it.
Some other mechanisms around.
Marketing and positioning relative to the other brands.
You view Europe optionality around kind.
Kind of recapturing some of that pricing.
Pressure that you felt in Q4.
Yeah sure Neal So let me just let me unpack that quickly. So basically two questions. There first one is okay, which markets did you really experienced kind of the price settling that royalty is the gross margin line in the second.
What kind of tools that the business has supposedly to effectively counteract ups.
So relative to the first question look there's constant kind of price movement within all of the markets. We operate in user nascent markets you've got.
Given the different kind of regulatory structures and the supply demand kind of.
Economics that are that are at play with each of these markets.
<unk>.
We do see kind of month to month and quarter over quarter swings in the fourth quarter.
And the state data really really shows this Pennsylvania and Nevada overall were two of the markets where you saw some.
Some flattening on the total size of the market and that that effectively that that lack of growth kind of resulted in some price compression that took place.
At the competitive level and then in terms of what we're doing.
Within the business to counteract those I mean look when we've talked about this a few times one obviously its scale within the business. We're leaning in there we have a diversified market base. It's one of the things we love about our business.
We're not beholden on one or two markets at this point, we're operational in 15 markets, they're a different kind of stages within their kind of growth cycle and then last we said before but its brands its building effectively.
Some pricing.
The ability to kind of price our products given kind of a premium kind of folks that we have and having some some real price control instead of effectively letting market dictate price 100% of the time so.
Look again these markets are our nation. We're watching this closely we live this day to day and it's something that we're going to be navigating over the next next few quarters.
That's great. Thanks for the color on that and if I could ask just a follow up on the brand.
On the brand topic, then now that you've had the brand portfolio really start to gain prominence in all of your states to varying degrees.
How do you view, how do you view the buy versus build decision going forward with respect to your brand portfolio.
Yeah. Thanks, Phil.
It's Ben.
Yes.
Trying to study and learn as much as we can all the time and close to the product and the consumers is helpful for us.
The.
But the hurdle is pretty high to buy but if things make sense, we're willing to do it it's about looking at the portfolio composition broadly it's about the pricing and then it's really about capabilities.
Of the things is we're not going to do everything forever.
The business does a lot of different things and I think specialization and focus.
Okay for us so we're constantly examining it.
The best place for us to be in the acquisition space and brands to speaking candidly, it's something that we don't do ourselves inventing and creating his heart.
So that's where it is.
We load the brands, we load the consumers' relationship with the product around the country and we think Theres some special things going on out there on our house of brands a family of products and others, but we know the consumer is developing a relationship with this product and a long less than sticky way.
Got it thanks, a lot and good luck.
Sure Thanks for the questions.
Our next question comes from Matt Mcginley with Needham You May now go ahead.
Thank you the industry data would suggest that you did better than most in the fourth quarter with your wholesale revenue, but it looks like the net revenue is actually still down 3 million sequentially. I guess can you how should we think about that decline in the fourth quarter relative to the growth in the CPG segment I think most of US would assume you would have into the first quarter and through the duration of 2022.
I think Anthony.
Relative to the comment you made on gross margin was that decline in wholesale revenue driven by pricing or was there also something that happened in a specific market on the wholesale revenue.
I'm, assuming that's probably the along the same lines what you what you already given your remarks on gross margin.
Yeah, I mean look like I said there was there was some movement in the fourth quarter just across the business, particularly now given the number of number of markets that we're operating in.
You know.
I guess, just kind of stepping back though.
Again, as we kind of looking at the markets, where we're seeing kind of <unk>.
Some of this activity.
It's something we're watching closely.
Obviously, we're kind of leaning into the Burton county of the business that we have so one of the reasons why you saw the decline that you did with the company ended up effectively shipping more product to its own retail store base.
Thereby creating more intercompany revenue for the quarter, which dropped that kind of net net wholesale number that you referenced.
Part of that was just supply driven.
Again within these markets are.
Our retail stores were big buyers of product and sometimes if we cannot kind of fulfill the demand that we have at the retail level from third parties, we have no choice, but to effectively deferred product from our own facilities on wholesale facility strong retail stores. So in some ways really just the availability of product at each of the Mark.
What levels is a big driver of that intercompany number.
In terms of where it's going really hard really hard to predict like I said, because the supply and demand kind of dynamics within each respective market play a role in driving that kind of that's finger on a quarter to quarter basis.
Okay. Thank you. My second question is on inflation can you help us frame.
What are you seeing this occur right now are where we're likely to see inflationary pressure that would impact your P&L and balance sheet and what do you think the best tool bar that you have at your disposal to attempt to offset those headwinds to cash flow and margins.
Yeah look I think this is something that I think all the operators in this space are navigating.
Balance sheet side, it's really just on the capital projects that we have ongoing.
From that perspective, obviously, youre seeing an increase in both the labor cost of construction as well as raw material.
A lot of the commodities, obviously, you've seen a run up in the supply chain shortages.
I have just put additional pressure on that within the business you know what we've got a lot of raw material coming in from from overseas primarily Asia.
Seeing.
Obviously seeing growth there shipping rates.
Our.
Just.
Not a huge number within the business, but in terms of the rate of growth that we've seen in terms of the cost should containers cros.
Across the ocean drastically kind of increase and then obviously kind of on the.
On the on the payroll front.
We've seen an increase there just in terms of staffing at the retail and wholesale kind of levels. So look it's showing up showing up on the balance sheet is going to show up on the P&L.
We're not going to make excuses. It's candidly, it's just something that we're going to have to kind of deal with it navigate through and as we were.
Look ahead, it's something we're just going to closely watch throughout 2022 and.
Just kind of maybe make adjustments on the fly accordingly.
Okay. Thank you.
Our next question comes from Pablo <unk> with Cantor Fitzgerald, you May now go ahead.
Good morning, sorry, I joined the call late so I'm sorry, if this was asked already but I'm very impressed with your recent deals seem to Rhode Island in Minnesota, I know it looks like small states.
That's only two licenses in Rhode Island Ah three I'm, sorry, I joined Minnesota in the three and four the island. So question is do you have visibility in places like Virginia.
The island, Minnesota, where do your best to almost $500 million combined that will not be any new new medical licenses issued for the next two or three years, and then remind us in those three states. If you have any caps on stores and cultivation. Thank you.
Great Hey, Pablo Thanks for the question Yeah look we love those stage two we're doing the same thing you are.
<unk>.
Scott.
We're not against new licenses coming into the various states.
It is two licenses in up to serve 6 million people know.
Going to work great. It's about first mover, it's about scale and you know theres a lot of nuances in each state.
I think you asked how many stores are each state I've tried to do it but we can follow up on the details of the Minnesota. We have five open go into eight per the law now with those other three at various stages.
Virginia, we have four like we mentioned fifth coming soon.
Six.
Sixth as off premise production in Rhode Island is one store one production will.
We will invest a little bit to scale that up a wreck coming not enough.
Alex from our own supply the supply ourselves small state.
Same math applies whether theres zero is or not.
So it's really the same game.
What's going on and just.
Big picture on new licenses, we don't lose a lot of sleep on new licenses coming up we like our product we love first mover, we like having the lowest cost dollars out there to go do we're going to do and at the end of the day, we think consumers have a relationship with our brands that are going to want those it's just so early in some of these markets you can't even buy flour.
What's going on in some of the markets is just early on we know what that demand curve is going to look like so that's what we're underwriting and even if you double the licenses in each of the states. It doesn't make us really flinch either on price paid.
Dollars being allocated on demand curve or anything like that because.
You can find your rhythm and enjoy the journey with dog walkers and what <unk> can bring to people is pretty differentiated.
And so we're excited about that.
That's good color, let me just a quick follow up can you give an update and give some new Jersey I think youll playful two stores when you blow for the third stores to go Rick.
If you have any visibility on that same thing with New York you have 40 medical store supports are you going to add four more but do we know when you can start out in those four stores. Thanks.
Thanks, Bob with Great questions short frustrate answers no visibility and no answer at New York.
So we have to we're confident new Jersey is learning as we go to hope to partner with the state and help through this.
It's going to turn on I do not know when and I have no offering of commentary about win because it's a.
Tricky process here as everybody learns it together in New York.
I'm Bill passes we are active doing what we said we were going to do we bought the prism and more work again Lockheed.
Locking people up for marijuana now we can employ people and marijuana is a major change into what's happening in society in the U S. So we really want to put that on display and regardless of what else is going on the state 20 billion people is $5 billion of demand.
We're not penciling out $2 billion in sales out of the gate in any way shape or form for us we're putting in dollars, where we can create amazing returns on those investment dollars.
Vigorously low multiples of EBITDA out 24 months and Thats, great for stakeholders shareholders and actually it's great for consumers in the country. So we've talked about that on timing or details of stores nothing I think we're kind of sit.
Sitting behind many of the others that are going to come in with the <unk> do have a first spot here and we're going to get going but I don't have a lot of clarity on the additional stores.
Got it thank you.
Sure.
Please limit yourself to one question so more questioners may ask their questions.
Our next question comes from Eric Laurie with Craig Hallum, You May now go ahead.
Great. Thanks for taking my question and congrats on another strong quarter here a bit of a follow up on the last question for me.
Obviously, the timing of New Jersey, and New York Adult use sales beginning.
Out of your hands.
But can you talk about when you expect your production operations to be sort of fully up and running and then if we should expect a large wholesale presence out of the gate or if you guys.
You'll have more of a focus on vertical our intercompany sales. Thanks.
So for New Jersey.
For both New Jersey, and New York, If you can thanks.
Titan.
What was it you said timing of the regular wholesale retail.
As the business like we always do.
So after the step up in New Jersey, we're in Patterson.
I think we doubled the number of flower rooms, obviously, there's a storm theres a lot of different things, but that is online and coming together. So we will have more product will optimize would be with the operators in the state in order to best serve the consumers and keep the patients satisfy that product that's the priority.
So I can't tell you, where it's going to go I don't really know what we're good at optimizing that we liked the two retail locations that will be approved for Rex.
And so.
That's going to be strong and I have no no real commentary on New York This is Earl.
Early stage, we are pretty head down building doing what we say, we're going to do which is building this cultivation campus.
Getting things right and Warwick.
We will come up for air.
One of the two or three conference calls ago I forgot throughout the day 123 as Rec in New York, which was very far away, which is obviously now less than less than 10 months after today.
It seems very close.
Amazing how that changes so I think there'll be a wreck sale in New York in 2023.
I do believe that but I have no real insight actually.
Our next questionnaire.
Our next question will come from Spencer Hanus with Wolfe Research.
Oh go ahead.
Good morning, just to follow up on the price settling you guys saw on <unk> have you seen any improvement as you look to the first quarter and then.
How did the promotional intensity in the lower end of the market compare to what you saw in some of the higher quality into our product that you guys are selling as well.
Sure Good question.
I would say that.
We're not seeing kind of the rate of change that we saw in the fourth quarter of the current moment.
Again this is real time in these markets move pretty quickly, but just what we're seeing we are starting to see some kind of real settlement.
Sure.
That relates to kind of the initial question you might just repeating the second one that yet.
Yes could you just talk about the promotional intensity in the lower end of the market compares to what youre seeing in the higher quality indoor flower yourself.
Yes, so look we've talked about this before.
Before but obviously, where we're seeing kind of the most.
Yeah the most.
Call. It compression is really on the lower end of the market.
Kind of low to mid <unk> kind of quality levels.
Across all the various categories and Pennsylvania for example, given the lack of available is obviously that it just gets pushed in debate in flower, that's really just where it shows up so it doesn't get spread out.
Across.
Any other categories as it does and perhaps other markets.
But net net that's really kind of what we're seeing.
And like I said, it's real time and something that we're watching closely on a day to day week to week basis.
Got it that's helpful. And then what does the industry. Some prefer to brands is going to be a kind of a.
Big impact on where margins settle over the long run, but how do you think GTI and broader industry can just pull forward the shift in mindset for consumers to shift to purchase my brands versus the current you mentioned out there really THC per dollar.
So at this time.
Just responsibility.
Consistent product that delivers on its promise will develop that relationship with the consumer I think to the last question on the premium flowers essentially the most resilient the high quality flower drives the business drives people into the store core consumer.
That's a key core product.
So that's important.
Great. Thank you.
Sure.
Our next question comes from Aaron Grey with Alliance you May now go ahead.
I think for the question and congrats on the quarter.
So a question for me retail.
Sequentially, you talked about acquired stores as well as traffic being called out in the press release I was wondering if you could speak to the average basket.
Same store sales down 1% sequentially. Since you guys called out traffic that implies you know a lower average basket just wanted to know whether you could speak to how much of that might have been the pricing pressure that you've spoken to but also the broader consumer and a whopping impacted.
Inflation, so any color on Tabasco and health of the consumer would be appreciated. Thank you.
Yeah. So good question really what we saw with the bad.
The average ticket has you know.
Continue to slightly kind of come down now I will say that that's largely because effectively some of the pricing pressure that we did see so units per transaction is really not moving much.
But the ADT as did come down a bit look it's come down since it kind of.
Since it peaked during COVID-19 .
Kind of and it's really just kind of at a more normalized state today, but.
The quarter over quarter decrease that we did see an ADT was just directly correlate really to some of the price declines that we saw in the market. So.
Units per transaction was relatively consistent.
And we anticipate that that will probably stay the same and our guests. We're in a more normalized state than we were call. It.
Three quarters three to four quarters ago during that during the peak of Covid.
Okay, great. Thanks for that color I appreciate it.
Sure.
Our next question comes from Michael Lavery with Piper Sandler You May now go ahead.
Thank you and good morning.
Hey, Michael.
Can you just update us on the capacity outlook and obviously, partly just helping us think about that as we model. The wholesale line I know you touched on some of the shifts to selling to your own stores and maybe a little bit of a pricing pressure. So I know that's a factor for probably what the Mexico, maybe couple of quarters, but should we still expect that.
Capacity step up in the second half, what's the right way to just think about how that unfolds.
Yeah, I mean look the better we're spending a lot of Capex turn on anything you will not have been a good use of funds.
So I guess I'm, specifically, just maybe how how much can you pinpoint the timing is what I was getting at.
Not much we've shied away from making predictions and then walking it back and changing things.
I don't know when new Jersey is going to turn on rack I don't know in Connecticut is going to turn on rack I don't know, what New York City turnaround rack.
And basically our Capex projects are essentially on time on budget, there's some delays in the supply chain, but Anthony and team and all the way down so I'm just an amazing job sourcing these things so.
I will tell you in places like Ohio, Maryland, and New Jersey, just off the top of my head.
New rooms planted that have not yet hit revenue.
So therefore within the next six months roughly half of those have to come out they're not $100 billion capex spend but they're material for those markets and again, just Ohio, New Jersey, Maryland.
All states, we like all with demand coming in pretty.
Pretty strong setup.
But I think just zooming out to you said how should we think about your continued investment I would take the year. So the money goes in a year later the projects there six months to grow the plants.
That's helpful color.
On the core business, sorry, if I could just one other thing just to make sure everybody understand it's very important we scaled that Anthony mentioned this in his pre comments everybody talking about the margin, which is not something we run the business by the way we run the business on the free cash flow and the sustainability of the cash.
But if we spent $200 million last year, Capex, which we're underwriting more revenue coming out of that capex, otherwise why would be expensive, we do not need the same kind of SG&A scale that we've had before so if you think through the percentages in the 2000 basis points to 20% from 50 to 30 and what that is getting scaled over.
Essentially we've already taken the weight by putting on the SG&A spend before the revenue is hit all three of those markets up materially increased spend and not yet flowing through so it's kind of important to see out I think people are very quarter to quarter basis based I guess everybody's got their own business and their own lens, but.
We're building the business for shareholders for the long term and we believe in the capital spend that we're doing on where the industry is going to be in three to five years, we have a lot of conviction on that.
So we're not as concerned in the short term everything we said it applies to the medium and long term and we like where the business is going to be because those states and I mean, I'm just tried that Virginia, and New York, New Jersey, Connecticut, It's 41 million Americans.
That have legalized candidates coming their way, where 24 months ago. There were essentially in the desert literally and that's not even including some of the other states going so.
It feels to us like the industry is digesting on this growth we look at the industry quarter to quarter numbers and see the whole thing. We don't think in three years. The U S is only a $25 billion industry, but was it wouldn't make a lot of sense to spend the way. We are we think it's going to go up into the right.
So just thought that'd be helpful. As you think about the spend and the growth in all of this stuff, it's not a quarter to quarter play over here as you know it's hard to hire the right people. We're building a major team, but I'd rather bring somebody in the door now to say hey, here's how to get prepared for 2024, you've got 18 months.
And that's how we're trying to build and set up the business.
No. It really helpful. Thanks for all that.
Sure.
Our next question comes from Andrew <unk> with Stifel. You May now go ahead.
Hi, Good morning, and thank you for taking my question.
Just.
Just to start off with a housekeeping item could you talk a little bit about what that $4 $5 million. One time charge added into the Q4 EBITDA is.
And for my actual question, it's more of a follow up as to what you just discussed.
You had never negative operating leverage in Q4 lots of head count that you that you talked about.
Could you discuss what we should expect going forward you are investing across your platform.
You continue to integrate the acquisitions.
At what point could we see this reverse to positive operating leverage.
Yeah, I'll start then hand as Andy on the non operating in the <unk>.
And for fun.
I think the pace of spend on the SG&A will slow because what we decided to do is instead of being behind scaling in advance.
One then couple of the states in turn on exactly when we thought but I didn't want to be Super late so we're very comfortable with what we have here is no slow from a slope standpoint on the fixed because the infrastructure here should support hundreds of millions of dollars of more revenue set another way right and if we get scale from 20% of revenue right and that 52.
30, you should see scale in the business is hundreds of millions of more revenue come on overtime.
So that's why we said you know the SG&A has all of the labor for retail. So that's not so scalable. These box essentially has the cost that it adds but it's really the production facilities in all of this capex spend that takes a while to hit the revenue line and then doesn't increase the spend and then flows through.
The other ones I think.
You referenced kind of a $4 $5 million adjustment you know what.
Gaps in interesting animal.
The adjusted Youre referencing was non operating non cash.
But just given kind of GAAP nature.
<unk> of our P&L, we got a number of things that kind of rolled through there in terms of contingent liabilities.
As well, it's just kind of other business items.
Like I said are not operating and noncash related.
Royalty that other kind of income expense line items. So our footnotes will have additional detail and you'll be able to kind of track it.
Look we're a bit old school in this when you look at look at our adjusted operating UK, but looking at cash flow from operations.
Yeah.
I think anyone that's kind of going through this knows that.
Unfortunately, GAAP is not always kind of the best metric to use when assessing kind of the financial performance of the business and so but that's for an App you referenced was noncash nonoperating.
Thanks for taking my questions.
Our next question comes from Todd Cohen with <unk> Capital you May now go ahead.
Hey, Ben Thanks for taking my question I'm, just wondering if you could talk a little more about the opportunity you see in Minnesota and the thinking behind the acquisition. There I mean is that primarily to get in ahead of a potential flip to adult use surgeons, Minnesota medical market kind of stand up by itself that with flower and edibles coming online later this year like how good is the return.
File in Minnesota, even absent that all used.
Great Great question.
Excellent and then it could be.
Even better.
We underwrite it as simply as what's the demand what's the supply supply demand.
What's our edge, what's the product and all the other sort of like competitive set ups here, but.
Even if theres more operators in the state we think that for 6 million peoples demand now to your point is at record or medical without any political insight.
Breakfast coming why would it not.
It doesn't make any sense to us for not to know you'd political will you just several other things, but illinois is going to about $500 million in taxes.
Hundreds of millions of dollars being spent in places like Ohio, Virginia, Illinois.
It's quite a good economic stimulus program provides a lot of jobs. There's a lot of organized labor that can come and construct these facilities. So.
We're not underwriting a based on which session are which politician where underwriting based on the U S. Consumer wants candidates for wellbeing sleep better people want more wellbeing everybody is being hung over.
It looks like so obvious so we think that it continues so in order for the 25 billion to get to 75 billion somewhere some of the states like Minnesota, New York, New Jersey, Virginia, all you'd have to actually turn on and go forward. So we think it goes up into the right over time.
No rush, we got a lot of work to do we bought a facility.
Exactly we would run in things are upgrading flowers is hitting the market. This week, we're very excited about but there's a lot of work to do we see unbelievably attractive return on invested capital and incremental capital into the Minnesota market out in the short and medium term.
Not how big is the market theyre going to be as Colorado's 2 billion.
While operators, Colorado pricing is different but.
Something pretty big.
That makes sense. Thanks, Ben Yeah, Yeah I appreciate that thank you.
Great and again flower hitting the market as a big deal with 6 million people, who have never been able to buy flour and now you can buy flour.
I want to reiterate that's a big deal.
Our next question comes from Andrew Semple with Echelon capital markets. You May now go ahead.
Great Good morning, everyone and congrats on the solid quarter.
You know appropriately timed question here I wanted to follow up on that the dried flower.
Comments, and so we've seen regulatory approvals for dried flower occurring.
Several of your medical markets, including Virginia, and New York late last year, Minnesota today.
Just wanted to gauge.
Engage how the patient response has been to drive flower in Virginia, and New York. So far are you seeing the same level of uptake in those two markets that we've seen.
The other markets across the U S, such as Illinois, Pennsylvania and Florida.
And do you have any early indications for Minnesota as to the demand there.
Has there been any sort of early registrations or.
Patient planning up in Q. This morning, any color there would be helpful.
Yes. So good question, so theres anomalies within all the markets that you just kind of referenced so.
Let's start with New York. So you asked if we saw an inflection in fact, we won with flower revive what's unique about the New York market is that there was a quasi flower product in advance available in advance of whole flower. So while we did see kind of a pick up in the retail side of the business.
It wasn't as dramatic as we've seen in other markets like we did in kaufmann sustainable at that level.
And that was just because like I said, there was like a quasi cauliflower product already managed.
I mean literally today is day, one call it or.
I guess typically there was yesterday.
So TBD very early to kind of.
Stayed there I guess, we'll get a read probably by within the next hour or two on how things are going.
And then a Virginia look we did see a pick up one of the issues in Virginia is that the patients. There's a number of patients I think close to 8000 now they've applied to their medical card.
Not yet received the medical cart. So that's that's really kind of a glut in the system right. Now is just some administrative work that needs to kind of work through.
Yes, my yet once we see kind of a more normalized patient count, we're actually seeing kind of the true impact of flower, but just given kind of muted patient base, it's difficult to draw meaningful conclusions. There again 8 million person stay very bullish on the long term.
And excited about where we're at in Chicago.
Great. That's helpful on the dynamics. Thank you Andy.
Our next question comes from Scott Fortune with Roth Capital Partners. You May now go ahead.
Hey, Good morning. This is next stepping in for Scott I was just wondering if you could provide a little more color around the recent industry wide vape recall in Pennsylvania, and kind of the state department's process there.
It looks like your competitors were disproportionately more effected the new work, which they have opened up some additional market share opportunities for GTI. So any update there would be helpful. Thank you.
Sure so for everyone's benefit.
What we're referring to here is they've recall in Pennsylvania, So assuming now.
We produced really two lines of vape out of our wholesale facility we have there.
Our rhythm full spectrum <unk> 10, thats been on the market.
Inception, we also have a new line or enchant additional one that was that.
Very new that effectively had been on the market for less than a month.
And it's being shot distillate line that was impacted by the recall it was relatively nominal in nature.
I think really just what would happen. We just started to kind of ramp production on that in terms of what we've seen I mean look obviously a lot of people would kind of scramble to kind of satisfy the market needs were one of them. The team is doing a great job of just kind of.
Adjusted real time.
Working to kind of increase throughput just given some of the short term kind of supply challenges.
We're seeing given the number of products get pulled off the market I think it's premature to kind of say hey are we going to be able to grab share at this kind of situation I think right. Now we're trying to do is really to service the market kind of help out our partnership or partnerships across the retail store base, there and just make sure. We've got a healthy chunk of based on the market for all the other big consumer.
No.
Stay tuned we'll see what happens in existing kind of shakes its way through and that there is kind of that.
Amicable resolution in the meantime, we're going to continue to kind of.
It really diversify and focused on our rhythm baseline and continues to perform exceptionally well and we've got.
Big expectations for the current year.
Great. Thank you I appreciate that color.
Yeah.
Our next question comes from Mike Hickey with the Benchmark Company you May now go ahead.
Hey, Ben and team congrats on the quarter guys on revenue.
Just curious on.
Yes, your updated view.
For each category I think it's been about a year.
Initially sort of introduced stuff that you'd be going into that.
Category, obviously, you've done a lot of sense them sort of curious your learnings so far.
Relevant to the <unk>.
Gordon.
The price margin mix as it becomes bigger.
Thanks, guys.
Sure. Thanks for the question. This is Ben just before I hit beverage to your question just on the P. E vapor to the last question and the strategy and the thinking is kind of we're all in this together this is not an opportunity for green Thunder.
Step ahead of somebody or something like that nobody likes a surprise, we're all trying to serve patients who want to feel better. This is crazy that happened like this but everybody's dealing with it together. So we really are in partnership with the industry to sort of fill the stores make sure patients get what they need and sort of continue to adjust as not a dog.
A dog and pound on our friends situation, everybody wants safe healthy vape.
Consumers tell you what they like and so.
This caught us a little bit by surprise around here in Canada.
And then in terms of beverage so still a very small part of the category mix the basket, 1% ish. Some some markets it'll creep higher so to the last one is when does it become part of the business to actually think about its impact on the P&L.
Doesn't.
However, I think it's a very unique product from a consumer is it uses it what's the use cases, where they can substitute against and what it does for on Prem and social consumption.
So we continue to invest watch study be closer to the consumer I mentioned the on Prem up more of those opening up we believe cannabis is an experienced business and we continue to invest in that but the dollars and cents.
Ken or any other beverage in the business or even in the industry is not yet.
<unk> material.
But you never really know so we view it as a bet on the future and an understanding of who the consumer is how why we're.
And the experience is quite good and again I still haven't got anybody likes to be hung over and this can offer a lot of some of the benefits without a lot of the the downside.
Thanks, Matt Obviously, you guys are crazy.
Pretty focused here, but you do have a lot of retailers nationally serve a lot of markets scale manufacturing and do you.
Look at some point if you look at products.
Potentially outside of Canada is something ancillary to drive growth.
We try to stick to our niche do we know which is cannabis product branded cannabis products. So that it makes a lot of sense, we'll look at it.
But that's that's what we got.
Thank you.
Our last question comes from Kevin Doyle with Clover investments you May now go ahead.
Hey, Ben I.
I understand where we are.
It's a state by state issues and the competitiveness.
So where we are in the consolidation cycle just wanted to know if you can.
Give me some more color.
On the vision of the wholesale operation once we seek legalization.
Interstate Commerce I, just want to know do you have the cultivation capabilities.
To provide for the nation and do you intend to export.
In the future.
Two other countries. Thank you.
Sure. Thanks, Yeah, good opportunity to just reiterate what we do on the flower side is high end indoor premium flower.
We don't view ourselves as a.
Supplier of commodity cannabis to input to the market.
So no I mean, if all of a sudden 300 million Americans Goodbye are proud of is we don't have enough processes. We're in we don't have excess inventory and one of them.
The question is really like I think it's up to all of us to examine inventory line items here and see what's going on.
But.
And if you think something's up here, let me know, but we're double triple quadruple check we don't think there is an inventory issue. Therefore, no is it all of a sudden you could sell our flower rhythm to the country, there's not nearly enough.
That's not what we're up to we don't see that coming today or tomorrow.
So that doesn't really bother us too much.
But again high end indoor premium flower, we don't go top down and say, here's how much the market needs and hear someone who we need to grow we say, here's what $20 million to get us. He was with $80 million. It was $180 million to get us what makes sense based on that market the operators the timing the product.
All of the other factors.
We don't do things like supply the whole country, we do things like what's the return on invested capital based on the demand.
This concludes our question and answer session I would like to turn the conference back over to bank Kofler for any closing remarks.
Sure. Thank you thanks, everybody for joining us will be back with first quarter results in May and I hope everybody has a nice spring season. Thank you.
Yes.
Yes.
The conference has now concluded. Thank you Frinton today's presentation you may now disconnect.