Q1 2022 Green Thumb Industries Inc Earnings Call
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Good afternoon, and welcome to Green Thumbs first quarter 2022 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 of one question and one follow up question per person.
As a reminder, a live audio webcast of the call is available on the Investor Relations section of Green Thumbs website and will be archived for replay.
I'd like to remind everyone that today's call is being recorded.
Now I'll turn the call over to Leah Rosenfeld Senior director of external Communications. Please go ahead.
Thanks, Gary Good afternoon, and welcome to Green thumb first quarter 2022 earnings call I'm here today, with founder and CEO 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 app.
The 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 Securities and Exchange Commission and Canadian Securities regulators, including 22 on annual report filed on Form 10-K and support Obama.
Todays earnings release can be found under the investors section of our website <unk> Com 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 rapid discussion green thumb will refer to non-GAAP financial measures, including EBITDA and adjusted operating EBITDA.
Filiation of non-GAAP financial measures to the most directly comparable GAAP measures.
And our earnings press release and SEC filings. Please note all financial information is provided in U S dollars unless otherwise indicated.
So everyone hears that.
Good afternoon, everyone and thank you for joining our call today we.
We reported another solid quarter for Q1 revenue increased 25% year over year to $243 million, our seventh consecutive quarter of positive GAAP net income came in at 29 million or <unk> 12 per share and we continued to benefit from increased scale and operating leverage to deliver adjusted Oi.
Operating EBITDA of $67 million and free cash flow from operations of $55 million.
This is our ninth consecutive quarter with positive free cash flow from operations.
This quarter, we had a 200 basis point decline in gross margin versus last quarter, but still came in above our stated goal of 50%.
That said and as I've repeated before we are more focused on cash flows and margins, which can fluctuate quarter to quarter, considering all the moving pieces in our business.
Some of these include starting up operations in new markets possible delays in adult use sales as well as investments made in any given quarter to better serve our customers.
So our margins are important and we have discussed the 50% gross margin goal I think the more important factor for us and the industry.
As cash.
Last weekend was the Berkshire Hathaway annual shareholders meeting in Omaha, with Legends, Warren Buffett and Charlie Munger.
Several boats from our team were able to listen to warrant say that cash is quote like oxygen. It is there all the time, but if it disappears for a few minutes. It is all over.
We live on that cash oxygen and plan for that to continue.
Our focus on cash has been in our DNA since the very beginning.
A discipline that we will never abandon because to us and many of our mentors the best path to true value creation is building a business that can generate attractive cash flow over the long term and deliver consistent high return on incremental invested capital.
So to our way of thinking follow the cash.
Now.
For a short update on our most recent acquisitions.
In 2021, we entered three states, Virginia, Rhode Island, and Minnesota and.
And we like our setup and each of them.
All three are catalysts for future some subset of our products and we are excited to bring our authentic brand like rhythm dog walkers and Incredibles two more Americans.
As you know, Virginia, it's already past adult use legislation and we've begun scaling our operations by adding two stores this year and expanding cultivation capacity.
Adult use sales are coming and we're working hard to be ready.
After months of negotiation, both the house and Senate are Rhode Island introduced a bill to legalize adult use cannabis sales in March.
Sales could potentially begin as early as October 2022.
In Minnesota, we added our sixth store in maintain all located in the southern part of the state.
In March we began selling flower in Minnesota, dispensaries, and we were proud to offer legal high quality flower to Minnesota patients for the first time.
The introduction of Edibles in Minnesota last year, which will diminish.
The introduction of Edibles in Minnesota later, this year, which will bring patients another form factor to improve their wellbeing should prove another catalyst to the market.
All three of these acquisitions were quickly and fully integrated into the Greenfield family something we've improved that over the years.
Now for the New Jersey news.
On October 11, New Jersey gave the Green light for seven operators, including Green zone to begin adult use sales.
The long awaited prohibition in the Tri State area as finally ended and as anticipated we are seeing strong demand in our stores right Patterson and rise Bloomfield on.
On an industry level on the first day of adult use sales in New Jersey, approximately 12000 customers purchased nearly $2 million of recreational cannabis products.
This is certainly a cause for celebration and it's also a good example of positioning and patients by Green zone.
We first entered new Jersey by winning a vertical license in December 2018.
License had virtually zero cost to investors.
We decided to plant the greenbaum flag in Patterson and economically disadvantaged area to build our cultivation and processing facility necessary to create supply for retail sales, while bringing important job creation to the community.
In 2019, one year after being awarded the license we opened our first store in Paterson.
Followed by two more stores in premise and Greenfield in 2021.
Today, we are proud to serve medical patients and adult use customers at raws Bloomfield and Wright Patterson.
With raws premise, serving medical patients only at the current time.
The goal in New Jersey has always been to expand access to well being through candidates in a state with over 9 million residents to that end, we remain focused on prioritizing the needs of our new Jersey medical patients.
Ensuring a great experience for our new adult use customers.
This focus has positioned us well for the adult use transmission in New Jersey, a market that is now estimated to reach $2 billion in sales in the next couple of years.
The key takeaway here is that we are playing a long game.
One that requires patience and discipline.
Big rewards.
Patient and disciplined in our core skills, we work on every day.
The Great American growth story continues to be alive and well.
<unk> are continuing to choose candidates for wellbeing and we believe that our brands will be a core part of that lifestyle.
We continue to have conviction in our core market thesis, which is proven everyday by increasing consumer demand.
We believe in the plants.
We believe that our products and we are committed to promoting wellbeing through the power of candidates for the American people.
Now I will turn the call over to Anthony to cover our financials Anthony.
Thanks, Ben good afternoon, everyone.
You just heard the company posted a respectable first quarter generating $243 million of top line net revenue was $67 million adjusted operating EBITDA.
Total net revenue decreased $1 million over the previous quarter with gross CPG revenue declined $4 million in gross retail revenue declining 1 million.
As I previously highlighted the difference between gross revenue and net is intercompany revenue.
The company sold $4 million less product to itself in Q1 than it did in Q4.
During the quarter the company generated gross margins of approximately 51% 200 basis point decline over Q4.
Pricing headwinds in Pennsylvania, Nevada, and Massachusetts, along with installation with the biggest contributing factors.
The balance of the decline was attributable to startup costs associated with New Jersey adult use and recently completed wholesale facility expansions.
On the SG&A side, excluding depreciation amortization, and one time transaction costs and stock based comp normalized operating cost approximated 61 $4 million increased over the 57 million incurred in Q4.
The majority of the increase was payroll related primarily across our retail and shared service functions.
We continue to closely monitor our overall SG&A spend relative to our topline growth and margin performance as our intrinsic goal remains to keep gross margins and adjusted operating EBITDA margins at or above 50, and 30% respectively.
Other income for the quarter approximated 6 million, which primarily reflected noncash nonoperating gains associated with our investment portfolio as well as the warrant liability associated with our senior debt facility.
Net of these expenses the company generated approximately 29 million and net income of <unk> 12 per share our seventh consecutive quarter of positive earnings per share for the business.
Moving onto our balance sheet, we ended the quarter with approximately $174 million of cash.
During Q1, we invested approximately $60 million in gross capex, when including the spend associated with our sale leasebacks.
On a trailing 12 month basis. The company has invested approximately $240 million in gross capex.
We remain bullish that our capital allocation decisions are today, who pay rewards for our shareholders Tomorrow.
On our favorite topic cash <unk>.
Generally just over $55 million in operating cash flow in Q1.
We remain vigilant and minimizing our inventory and other working capital accounts to ensure our cash is working for us versus getting trapped in our balance sheet and inventory.
In addition, with the capital markets essentially close to campus businesses, our substantial cash position along with our positive cash flow from operations translate into better sleep for our stakeholders.
As we look ahead to the balance of the year you can expect us to continue to do a few simple things.
Over one.
<unk> and control we can control.
To see the consumer everything we do is through that lens.
Yuri watch our cash.
Or ready to be opportunistic when others are fearful.
New Jersey adult use kicked off on for 'twenty, one and early results look yearly similar to Illinois Circuit January 2020.
Congrats to our team for all they did debate to launch a success, we truly did take a village.
Next up is some combination of New York, Connecticut, and Rhode Island.
Good news is if you are a shareholder in green thumb.
We have actually in all three.
Thank you you bet.
Thank you Anthony.
Before we open for questions I will add on a couple of items that I believe to be both important and urgent. The first is creating a diverse and equitable cannabis industry.
I'll be honest this is very hard for.
More than three years, we've been struggling to find an equitable solution in our home state of Illinois.
We hope other states are able to find a quicker path to an effective model and we are here to help.
Green thumb will continue to be an active voice for change in equity about the program in Illinois, and the industry as a whole.
I strongly encourage other cannabis operators to join us and despite it is far too quiet.
The only way this industry is going to be successful is if others can share in it and it is not solely a group a white man like me.
The opportunity is now for our industry, but it will take a village, including industry operators state regulators and the media to demonstrate the genuine commitment to equality and inclusion.
Helping restore the damage caused by the war on drugs, which delivered a terrible blow to communities of color has been a core has been core to green thumbs mission from the beginning.
And while close to 75% of Americans live in states with legal access to cannabis.
It seems beyond outrageous there are 40000 Americans incarcerated for illegal use.
Systemic thing just this isn't a battle that any single organization can take all alone, but a green thumb, we're fully committed to a three pronged approach, including more education nonprofit investments and enabling new entrepreneurs.
Education is one of the most powerful tools and our lead programs in Illinois, and Connecticut, all providing social equity applicants with the knowledge and skills on the licensing process and how to operate a successful candidates business over the last year, we've committed more than $250000 setup scholarships that will help black and brown students gain access.
The canvas educational programs and higher Ed institutions like Olive Harvey College in Chicago Major Evers College in New York City, and the Cleveland schools candidates.
Our green Dot branded flower products was successful was specifically created to help our nonprofit organizations. We're joined the groundwork in their communities to create real and sustained progress against the harms from the war on drugs and we recently announced our second round of grant recipients last week.
We look forward to partnering with five more organizations submissions that are aligned to education expunge been more appointment to help create opportunity and change and impacted communities.
That going systemic changes a tall order and we want to be part of the solution as we believe this industry should create new well, particularly in minority communities.
At Green Zone, what keeps us excited and motivated everyday is bringing the American people access to wellbeing. We think this is a real American story.
America has created the problem.
Every year more than 100000 Americans die from alcohol related costs and another 75000 Americans from opioid overdoses.
Cannabis is helping yet is under study.
Stigmatized.
And illegal.
We step back and we think the country is stressed out and under extreme anxiety.
Factors like COVID-19 inflation, social inequality in the war on Ukraine, and put us on the verge of a virtual panic attacks enemies tough unpredictable times, our mission to promote wellbeing through the power of cannabis is more important than ever. So if you haven't tried our product now might be a good time.
Find your rhythm America enjoy the journey with dog walkers, well open it up to questions operator.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
As a reminder, we would ask for a limit of one question and one follow up per person.
Our first question comes from Lee Cooperman with Omega family Office. Please go ahead. Thank you I appreciate it.
I guess the question I'd ask you is.
You said, if you were a shareholder.
In Greece.
You gave some positive things, but you also have 65% decline from the high.
We just waiting for legalization is the only lever to pull to turnaround sentiment or basically is are things a company can do in their control I assume since you come across as cash is king and given the cost of capital in the industry. The odds are repurchases not in the picture I look at Bloomberg and I see.
Two or three pages of insider selling I see no insider buying.
I think the story is so good why we're not seeing any insider buying.
Thank you good luck.
Great. Thanks Lee.
Ben as you know you've been with US a wireless story remains intact I do not think we are just sitting around waiting for federal change for anything to happen.
I think the business in the us and the industry has proven.
Prior to going public when it was more of an idea to create $1 billion industry at 30% $1 billion company at 30% EBITDA margins puts us in a pretty good spot where the industry is 400000 Americans working productively. So instead of federal change in DC I think I would turn it back and say we need financial change in New York.
Our stock exchange to the NASDAQ will not list our company as you are concerned about stock price.
Comment on stock price would be.
What I meant towards mentor has said for a long time.
Stock market as a short term voting machine long term weighing machine.
And until there is more access to buying the stock at mainstream exchanges from the mainstream exchange to hit.
Even though a longwall moves where even though retail investors on something like robinhood or other sorts of exchanges and allow more demand to come in at the supply demand mark to market World.
And so you're right, we listen to bucket, we think about cash is king and we're running the business out of ways. Because we think this is a $75 billion to $100 billion U S.
Industry.
Fully invested in the company.
You have all the right buzzwords, but I don't see the accuracy insider selling I don't see inside a bank that was my point and I know youre not going to buy what what's going to make the management buy.
You don't see any real insider selling.
What you see on your Bloomberg comparable.
Joe we are huge believers in awarding the team with equity they get equity, sometimes theres filings, because you've got equity there's tax trigger and things like that per the rules, but did not see any swap of insider selling at all were convicted with a large im the largest shareholder of the company and we have bullish view on the medium and long term nature of both of the industry in the U S and our.
Business well my recommendation is go look at Bloomberg and see what you see and what actually is nothing but inside selling for three pages I don't see any insider buying whatsoever actually options surrenders and I'd see outright sales and you know what I'm talking about.
I think you've got all the buzzwords, but.
But that's partly I hear Ya that's good I. Appreciate it we have conviction you know what I really think to be really totally candid with you is influencers in New York like yourselves, who have a voice with the New York stock exchange and the NASDAQ will not let us be listed this is leading to real damage in the industry and so I think if we could have a voice with the New York stock exchange.
The NASDAQ the board on TV to talk about it CNBC, we have trouble with if we can list in the New York Stock Exchange Americans can't buy the company that is selling them product that is enabling wellbeing.
As you want because theres not buyers institutional basis in New York and you have a voice on CNBC.
I'm going to discuss it.
I take my bathroom Elizabeth Warren that's about it I'm not looking for more battles, but thank you and good luck.
Thank you.
Next question is from Matt Mcginley with Needham. Please go ahead.
Yes. Thank you can you help better define the drivers of that 215 basis point decline in gross margin that you had in this quarter. The price decline was most of that pressure last quarter, but raw material and wage inflation or new factors that you called out I guess, what that price declined more acute this quarter and how should we think about that impact of raws and labor inflation through the remainder.
The year and how that will impact your margin rate.
Thanks, Matt Yes, Anthony here, so when I mentioned in my prepared remarks.
Biggest driver of the compression that we saw on the gross margin line.
It was really price price activity that we saw in Pennsylvania, and Nevada and Massachusetts.
The other factor is obviously inflation, which everyone in the industry is dealing with and then in addition, we had some staffing where we staffed up in advance of New Jersey adult use and then on top of that we had additional staffing in some of the facilities, where we just recently completed some some expansionary capex. So.
Look we're watching these markets closely.
There's a lot of things that kind of go into the gross margin line.
We further unpack that a.
The biggest driver was really on the wholesale side of the business, where we know we get great leverage when we put more revenue through that through that portion of the business. So we're watching it close that was the biggest driver of the decline in <unk> and like we said long term, we fully believe that we can kind of achieved a 50% kind of gross margin level within the business.
Okay.
In the first quarter the industry revenue is soft based on a host of factors that you clearly we're not immune to but has the recovery in April in the opening.
Adult use sales in new Jersey, giving you. The competency you can resume topline growth again in the second quarter or is that does that outlook a little bit premature.
Look I'd say at this point, we're one month in.
April was stronger.
In January and February were watching closely I would say right now we're comfortable saying that we should achieve flat sales.
But at this point that that's what we're comfortable saying given we're only call. It a third through the third quarter.
Okay. Thank you.
The next question is from Vivien <unk> with Cowen. Please go ahead.
Alright. Thanks, so much for taking the question. This is Harrison leave us on for Vivien.
Look on New Jersey understanding it's still early days it looks like the product assortment has been pretty limited. So can you just kind of offer some line of sight on when we expect to see when.
And when we should expect to see additional form factors like pre rolls in your stores.
Sure Great question look, we obviously think that the more products that hit the market.
That's what's really going to drive kind of market expansion I would say in the early days, we're focused on on getting some basic flower items on the menu and bit by bit week by week, you should see an expansion I mean, obviously, we're incredibly focused on getting our dog walkers and our incredible is into the market, we think they'll do exceptionally well.
As well, including kind of a <unk> Barry that obviously is doing it's doing well in a number of markets. We have dog walkers currently on the medical side. So it's only a matter of time before we can introduce those on the on the adult use side.
Understood that makes sense and just as a follow up.
Talked about the.
Improvement that we've seen in two into Q3.
Cover the broader CPG space Altria called out.
Better than expected benefit from from federal tax return. So can you comment on how thats impacted your business.
Yes.
Yes, I'm not sure we havent quite as big a pulse on that if you look at last year's impact from the federal government with Baidu being elected in the Czech distribution was felt more materially no real comment on this year.
Understood I'll hop back in the queue. Thanks.
The next question is from Camilo Lyon with BTG. Please go ahead.
Thanks, and good afternoon, everyone.
Anthony I was hoping you could give a little bit more clarity.
And helping us understand what the run rate is of SG&A I think there was about a $50 million add back.
Acquisitions and other to get back to adjusted EBITDA, but I'm just curious what's the right level of expenses that we should be thinking about going forward.
Yes, so the SG&A line item on the P&L has a number of things running through it that are noncash and nonoperating so internally.
Internally, we focused on a normalized SG&A level, we did see a $4 million increase from Q4 to Q1, we went from 57% to 61.
Roughly speaking the break the break out of that 50.
50% driven by additional kind of.
Payroll on the retail side of the business as well as payroll on the shared service function side of the business.
Look I would say that we're going to have to continue to invest in the team, particularly as we kind of look ahead and see expansion coming.
In the northeast B adult use but obviously, it's something we're watching very very closely to make sure that we don't get too far ahead of ourselves in terms of our staffing.
As we look ahead, so I think on a run rate basis.
<unk> were at 61 million.
I would anticipate that number growing now how fast that grows will really be a big driver really be driven by top line growth as well as kind of what we're seeing on the gross margin line.
Got it and then.
Yes.
And could you parse out what the acquisition component was about $15 million add back and let some of those from lease line mainly right.
Well, what's interesting about.
At least this quarter that when we see a change in our contingent liabilities that actually is actually runs through the SG&A line. So.
In this case.
A big number that you referenced effectively we had an earn out you value that earn out over time in your constant kind of revalue that earn out and based off the performance of the underlying business.
We estimate that the debt the liability associated with that earn out has declined and were forced to take that benefit through the SG&A line, which is why we added back on adjusted operating EBITDA.
Perfect and then you mentioned the you are pretty clear and articulate on the gross margin buckets.
But now that New Jersey is on it would it would.
Theme that Q.
Q1 margins gross margins would be the nadir for the year and that you would steadily improve going forward all else equal is that a fair way to think about the progression through the year.
Yeah.
Given enough we will see what the eight ball says.
I'm, sorry, say that one more time.
We're not commenting anymore on the future and I know the yes, but I think Anthony to give enough guidance.
Got it.
The next question is from Pablo <unk> with Cantor Fitzgerald. Please go ahead.
Hi, This is Matthew Baker on for Pablo we have two questions today.
I know this was touched on a bit but can you guys explain why there's such a large difference in the number of skus available on the medical menu compared to the rec menu and New Jersey.
And I'll ask a follow up afterwards.
Great Yeah.
The priority of the New Jersey market is to continue to serve the medical patient there.
Specific regulatory guidance on how much product based on proving run rates and pull through different products and different skus form factors towards the medical patient.
So essentially as I said in the prepared remarks is we believe and as we can.
<unk> tried to bridge, where all along with countries to prioritize the medical patients who are getting more relief or state or condition. So that menu is deeper same thing happened in Illinois, less regulated but more voluntary but same exact sort of situation and over time, you'll see more products more skus more brands to the adult use side.
First we will start we see plenty of upside as those menus equalize more form factor is more guidance on the state on detailed products.
Okay got it and for the follow up question just regarding the medical markets in Virginia in Minnesota can you guys give an estimate on what you guys expect like the average patient spend per month and the current count of active patients in each of the states.
The applications.
Both segments patients <unk> patients and patient counts are public you can get that and we're not going to comment on individual state per capita spend but it's pretty easy to take the total amount of the state divided by the number of patients in the state keep in mind. The number of purchasing patients is always different to get the ticket.
But I would not say theres material differences among many states. If the question is what products are available what's on the menu and how big is that patient count and we remain very bullish on Virginia in Minnesota too.
<unk> you asked about in terms of zoom out.
If you look at the populations in those states and look at where the capital is gone into build that supply.
These states are going to consume a lot of cannabis.
So that is the exact same population as Colorado in Colorado Center around for a long time and run rate of 1 billion and a half to $2 billion in Minnesota is a fraction of that.
So we don't think the consumers in Colorado.
Consume differently, its just been different history, and a different set up from a regulatory standpoint.
Virginia sets up when the regulations already allowing adult use several operators hard at work and we hope more entrants into the industry.
The governor is supportive of economic growth tax revenue and jobs and.
I believe up and down Thats, what this industry can deliver.
Alright, Thanks Scott.
The next question is from Aaron Grey with Alliance Global Partners. Please go ahead.
Hi, good evening and thank you for the questions.
First question for me I think you mentioned in the prepared remarks that New Jersey was eerily similar to Illinois. So I was just wondering if you could kind of detail. What you meant by that was that more store performance. We saw in the flip in terms of uptick there and then secondly, just on New Jersey.
Any commentary in terms of expectations to maybe start wholesaling in the market and how you're feeling about inventory level versus just supplying your own stores.
And entering more of the wholesale market on the adult use side. Thank you.
Sure. Thanks, Eric.
What a bad bond history does repeat Brian .
I mean lucky demand was big.
Your lines out the door.
And Fortunately it was something given the experience we had in Illinois in early 2020, we kind of knew what to expect.
The key was having a solid launch taken care of the team taking care of the consumer and effectively treating people well.
We feel like we did a nice job with that and each and every day, we're going to get a little bit better flow is going to get better.
The amount of products on the menu is going to improve and so as we look ahead, we're very bullish on the on the prospects.
If you could do you mind just repeating your second question yes.
Wholesale for New Jersey versus just having inventory for your own stores and how you're looking at wholesale in the market.
Yeah, Ben alluded to it but.
But the regulators in New Jersey, we're doing a great job of making sure that the medical program continues to thrive and making sure that every operator in the state really continues our focus on on the patients now for us.
We certainly plan on wholesaling, but when we wanted to do is build up enough supply. So that we can confidently kind of satisfy the medical need that we have within the state and then secondarily, we will turn to wholesale so.
If we take a long term approach, we're not going to do something shortsighted, that's going to put us off sides with the regulators or the market where really the patients because they are really why we're here and how we got here and so we'll just take a measured approach.
We just completed our wholesale facility expansion in Patterson, we have a new facility that's about to break ground.
So long term, we're confident in our prospects of being a big player within the wholesale side of the of the New Jersey market.
Alright, great. Thank you very much.
And second question for me enter open scale theme you guys have been.
<unk> been on for a while and you obviously have a number of markets. We will continue that out but as we kind of think of the next phase one state I kind of think of it as Massachusetts right. So now you got the Max six stores there eliminate cultivation have there for 100000 square feet you called out some pricing pressure. So as you start to see you know you might have scaled out to potentially your max's.
For retail and cultivation know how do you think about it.
Next steps for state like that that's when we licensed starting to get more competitive and how you guys look to execute and continue to improve within those types of marketplaces. Thank you.
Yes, it's a great question, Massachusetts is a good case.
We like our business out there the key thing to keep in mind, what certainly we have room up to the more than.
We could go more growth we wanted up to a 100000, we're not at the cap, but it's a question of allocation of capital and what the business looks like today. So today.
Masters of business looks very good to us in terms of our cash flow and the requirement of incremental invested capital and that we have to put in capital what that turns into from a business. We think of Massachusetts is more a grounds to build brands with consumers. There that are buying a lot of cannabis loving the product and then the rules evolve with different kinds of things that can come into play if youre talking about I'm talking about inputs form <unk>.
Factors sizes, there has been some unique rules of Massachusetts, but we think the brand build with consumers. There is incredibly important in the business produces.
Little business for US, we are not investing into a $50 million grow in Massachusetts.
That makes sense on incremental invested capital basis.
Alright, great. Thank you very much and I'll jump back into the queue.
Thanks.
The next question is from Spencer Hanus with Wolfe Research. Please go ahead.
Good afternoon, with the pace of gross margin compression over the last two quarters why should 50% gross margins really be the floor for the business and then related to that how are you thinking about where we are in the pricing reset that's taking place across most markets in the country.
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Alright, I think we're back live.
Anthony still here, sorry about that everybody, but we didn't lose too many people, but I think we're over to Spencer Wolfe research hopefully Spencer your call is Bob.
Yes.
Hey, guys I Hope you can hear me I'm, sorry for the Mic drop question there but.
But what we've seen with <unk>.
Hopefully it was a good one.
Was it was that but with the pace of gross margin compression over the last couple of quarters, maybe just provide a little more context on why 50% should really be the long term floor for the business and then I guess related to that how are you thinking about where we are in the pricing reset that just taking across that's taking place across a lot of markets in the U S.
Yes. Good luck, it's a great question Spencer.
Look there's a lot of leverage within the gross margin line that we can actually call.
And I'll, just I'll call off with you.
And I alluded to it a little bit my prepared remarks, but theres tremendous Berta county in the business.
Is something that if needed we certainly can pull to ensure that we kind of keep gross margins, where we need them that effectively means selling more of our own product in our own stores.
The other thing is scale that we anticipate to achieve at a lot of our wholesale facilities, which are not.
Not anywhere close to operating a true capacity and we look at kind of.
General CPG businesses overall, and we're confident that based off the kind of per unit economics.
That we're seeing even in.
In a number of the markets kind of out west we're confident that we can achieve kind of a 50% kind of gross margin line across the business.
There is obviously factors out of our control inflation being one of them, which which has a real impact, particularly on certain portions of the business.
But net net when we kind of unpack. It. It is a number we're comfortable kind of using as our kind of northstar because theres a lot of levers that we can kind of pull in managed to to make sure that we achieve it because we just it's a number that we should view as critically important to the long term prospects of the business.
And achieving kind of margins that.
That we're looking to target for our shareholders.
Got it that's helpful. And then I guess just in terms of pricing where do you think we are in the reset that's taking place across across across the country. Then I have a follow up on New Jersey.
Pricing is very fluid.
<unk>.
You have to kind of really understand the markets that we operate in truly understand it really kind of see what's happening kind of.
Within pricing of those markets, we like about our portfolio is we have a very diversified portfolio of states. So that diversification provides some insulation from some of the near term and short term kind of.
Volatility that we're seeing and still in a number of these markets kind of on the east coast.
I would say what's happening is that the value proposition is being set by the by the consumer.
So whether or not that's going to continue to evolve it certainly could.
In some cases, we're seeing kind of continued movement and others. We're seeing stability. So it's a little premature to kind of stay where are we in the cycle because to answer that you really have to kind of look at it on a market to market basis.
Okay Fair enough and then just on New Jersey, 12000 customers $2 million of product on on the first day. What do you think is the normalized run rate given the 12 12 stores that we have open in the state thus far and then pricing is still elevated obviously, given its a new market, but as we start to see cultivation ramp.
When do you think we start to see promotions really start to flow through there. It's a crystal ball, but that's you can give on that would be helpful.
So your question on run rate Stephanie.
North of that.
Look we don't have a crystal ball and we know you know.
One of the biggest limiting factor right now is this product on the menu as well as kind of throughput at the stores. So.
We think we should we should see kind of growth from here.
Your next question related to <unk>.
It was related to.
Wholesale expansion within the state I believe.
Yeah, how do you think about so yeah, how do you think about pricing going forward as production starts to ramp in that market more.
Alright, Yes, right you mentioned something about promotional what I mean look it's very early days right. So.
I'd say that we're going to take this call. It one week one month at a time.
For us we're working hard on the wholesale side of the business to get enough product.
Available for both our stores both in the medical and adult use side and then others.
And the promotional activity and what we see within the market.
Candidly, we'll take it as it comes.
And just one day at a time, it's hard to really assess it from here.
With these markets are fluid and certain things can happen so but at this point, it's too premature for us to kind of speculate.
Great. Thank you.
Okay.
The next question is from Eric <unk> with Craig Hallum Capital. Please go ahead.
Okay, great. Thanks for taking my questions.
Congrats on the consistent cash flow here.
Can you talk about just the product categories that youre seeing price pressure in <unk>.
That may be influencing your approach to the wholesale business or to your branding approach to the consumer.
Okay.
Okay.
Yeah I mean.
Thanks, Eric and you know the business well, it's driving a lot of our decision making.
I'm cautious to give a lot of detail on what's going on I think the proof is in the pudding, which brands, we're investing in which form factors, we believe in and what that leaves out for where we think there's less differentiation less room for the consumer to pay a pricing premium based on that brand.
The places we'd like to invest obviously or I think I hope are obvious our indoor high end premium flower, which we believe in the rhythm brand and we believe that the consumer over the long term, we will continue to like to consume that product ready to consume reroll dog-walker as the nation's best selling we will join the obvious when it's a real resonated with the consumer we think that category continues.
To expand we see category growth there.
Consumables ready to consume whether it's edibles or other sorts of form factors, certainly with can and beverage categories. We wont be betting on and I think if you look at the basket, which parts are out.
Not necessarily because the consumer will pay for it but certainly around scale, where we've chosen to place bets.
We're big fans of other things in the basket, but you can't do everything all the time and so we really are trying to prioritize around who the consumer is in the future what that form factor what that brand is going to resonate with them in order to lead the pricing and what I mean.
Look out in the World, we see branded products driving experience for Americans and that gives us a lot of conviction in what we're doing.
Alright, I appreciate that.
And then last for me here.
On the tradeoff between your CPG sales to third party versus your own retail can you just remind us of the <unk>.
<unk> in this quarter and then just kind of more broadly speaking can you kind of talked about.
Tactical changes you know to sort of increase margins here and there versus any strategic changes.
I guess, just overall comments on that sort of trade off between CPG sales to third parties versus owned retail. Thanks.
Yes look it's a great question, we talk it's adopt we talk quite a bit.
Quite a bit about this internally.
Look to really understand it kind of again it goes back to the market by market what's happening.
And in certain cases.
We think it makes sense to shift more of our own wholesale goods drove retail stores will do that in this case, we consciously pulled down the amount of wholesale goods that we were using to kind of beat our retail stores.
We shipped some of those goods to the outside.
Again.
It really is driven by what's happening at the market level.
And in Q1 that was a decision that we consciously kind of made within a few markets.
How we're going to kind of impact that line on a in the second quarter and beyond.
Really just a case of business optimization of what we think makes sense for the business at that at that moment in time.
Alright, I appreciate the color thanks, guys.
The next question is from Scott Fortune with Roth Capital. Please go ahead.
Good afternoon. Thanks for taking my questions just to kind of stick on the retail side that was down sequentially.
One of the metrics driving that primarily.
Are you seeing recent traffic and turns returning back to a more normalized or the average basket size kind of gap come from that cycle, just looking for normalized traffic levels that you're seeing going forward here.
Starting with the second quarter kind of where you think from that standpoint.
Yeah, Thanks, Scott it's Ben.
Good question I think there's a couple of ways to look at it top down with the first year over year decline minus three.
You look at the bottom of what's driving that.
The marketing I think Anthony mentioned it in his opening remarks, the P, a massachusetts and Nevada.
Really driving that people will move that it's up I think broadly across the world to your to your question on transactions or ticket Youre seeing ticket marginally down.
And youre seeing transactions up and it depends on which market you look at it without that.
The one down market, where they go up a lot.
That's the general just across the market.
Why is what we can say right.
Pricing under pressure massive transactions of massive new consumers as we think these markets grow over time or at least the ones, where we're investing real shareholder capital and have massive growth potential ahead.
The one factor just sort of underlying a lot of these questions is that theres going to continue to be an influx of capital, creating new supply into these markets hundreds of state to state market.
So as regulations change and as things happen with the consumer's distractions of what's happening in the capital markets were already seeing operators change their positions, we love it with where we're sitting we've been investing this capex and coming soon in the states that we've been talking about New Jersey, which we've been talking about on this call for eight quarters in a row.
This thing passed there was about the past just turns on so I think that's important to see out as we go take for just go a little bit more detail on the PPA market zoom out a little bit the market without pre rolls without edibles, and a medical market and our medical market that ripped and surge for 40 years out of the gate the fastest of any.
Net of any medical market, we've seen at $12 million plus or minus people in the state.
I think it's important to keep that context for how big we see that market with our 16 stores in our sort of careful allocation of capital for supply into that market for what's coming.
Got it.
And then a real quick follow up on that with price deflation compression environment kind of overall containerboard can you provide more of the initiatives.
And opportunities.
At the operation side.
To increase yield production efficiencies kind of operating glean from that side to drive the cost down is kind of what are you looking at from from the production operation side to continue to drive costs down with its pricing deflation environment currently.
Yeah look Scott did you hit them I mean, the two the two biggest drivers are in your pack and again as far as the wholesale driven.
So when you look at the wholesale side of the business is like Okay. How do you how do you drive gross margin there.
Really two big drivers number one it's higher yields number two it's greater throughput.
Robert.
Very focused on both.
I would say that.
As we look across the portfolio.
We're encouraged by the opportunity that we think we see within our own business and it's something that between now and the rest of the year. The team is very very focused on it.
Think theres potential unlock there which.
Which can be very beneficial for the shareholders and we see we see opportunity.
Got it.
One last quick one.
You mentioned, New Jersey, being like Illinois, when did Illinois become full production for you kind of having enough production to meet wholesale adult use.
Demand in Japan.
See that from a from a timing standpoint for new Jersey coming that way.
No I mean, I think it's important Scott to understand the set up in Illinois, and New Jersey, while eerily similar from the consumer at the store is not the same for green thumb from a setup standpoint.
We have a greenfield site in Illinois that are robust with 200 plus employees at each site.
We've been able to scale since 2015 and in New Jersey, what I went through on the timeline located in Patterson density in Northern New Jersey, We certainly don't have a $100 million capital investment in New Jersey that we had in Illinois since 2015.
So from our standpoint, a little bit different keep in mind, we have three stores tour adult use market is what it is we have 10 stores here in Illinois are very.
A very different setup, we again look at cash flow generation return on incremental invested capital. We certainly look forward to more product more diversification there, but from a P&L standpoint for green thumb, it's not exactly it's not generally similar.
Got it appreciate the color. Thanks.
From a magnitude I would say from a business characteristics. It is a consumer standpoint. It very much is because we feel like we know the consumer quite well and that excites us.
The next question is from Thai Collins with eight capital. Please go ahead.
Hey, Thanks for taking my question I wanted to touch on the labor cost inflation piece.
Do you feel that there's more of that to work through in the coming quarters to keep pace with the market and do you see that higher labor cost baseline as a potential risk to the longer term, 30% margin target given the stickiness of those costs.
Look I'll say that we're dealing with the same thing that everyone else is dealing with so.
Where it goes from here really difficult to say I mean, obviously, we're focused on building just an incredible high performing team.
But look we've seen we've seen pressure on that line item.
As it relate how thats going to kind of unfold over the next coming call it quarters and into long term difficult to say, we're going to focus on what we can control.
Not prepared to sit here and say that it's definitely gonna put put that 30% at risk on the long term, but I would say check back in a couple of quarters and we may have a different opinion on that.
Either positive or negative.
Got it okay. Thanks for that color and then and then has been with.
With the backdrop of another rate hike today and continued high inflation I guess I'm curious, whether you're viewing candidates as more of a staple or discretionary products on balance and how you think about the durability of candidates demand in the context of the pressures, we're seeing on consumer well today.
We strongly believe in the durability of this product has a place in the American consumer lifestyle.
We see a 99 plus percent industry, that's all off Prem mostly sold.
Seal childproof bag not allowed to be opened.
Is it a primitive nature for where this is for what the consumer experience can be.
There's a lot of talk about price deflation of things I always pricing pressure on products from operators, who have issues, but over time, we think about the experienced trade off when you think about the price of an alcohol consumption versus the price of a joint and it's sort of minor when we talk about the metric of price per bus.
There's reasons that other executives are taking interest in Canada as to why the consumer is moving over here.
So.
That gives us a lot of confidence.
Got it thanks for taking my questions guys.
Sure good one.
The next question is from Howard Penney with hedge I. Please go ahead.
Hey, Thanks very much for the question I actually I had a question on the pricing then I think you actually may have alluded to the answer to this question.
The pricing that you called out in the two or three markets like as soon as something you work with day to day, knowing that there is a normalization somewhat colder than pricing and pricing is coming down. So it's a day to day part of the business is there any was there any.
Behavior by any companies in those markets that may have been one off in nature or.
Sign of desperation or.
Any excessive.
Excessive discounting or promotional activity or any one of the markets that would say that pricing pressure. This past quarter was more than you would've seen normally.
Well, if I answer that question.
Yes, Thanks Howard has been.
I think the answer is yes.
Some operators have done some irrational things on pricing private information to go out and see what is going on.
As people figure out their margins or even their viability.
We are on the verge of test people eat their friends.
It's not a pleasant thought how to operate on a capitalist environment or other watching what's happening we love our position with both of those very secure if you take a market like Massachusetts with a reality with the size of that business with what's going on and then again the power of our brand new product, whether it's indoor premium rhythm flower or incredibles and as it can bring <unk> every.
Single store in the state et cetera.
We're bullish on those markets.
And then just last one for me the incremental capital spend for the balance of this year is going into what markets.
The continued capex that we continue to do is a lot of the finish of the same markets we've been talking about.
Virginia, New York now Minnesota.
As well as New Jersey continues to be in the markets, Connecticut with adult use it's not some of the markets, where youre seeing more maturity, where we have a nice cash flow business and established brands not as expensive to invest in those as it is to build like I said, a $50 million cultivation facility that over the T. Plus 123 generates attractive returns for us I think what you're saying is.
Or there are other folks, but a lot of capital and it's hard to make money in cannabis.
A lot of people that have done that I think capitalism is pretty efficient I think when stocks are down because they are just as much money sloshing to these opportunities, which is why we have a lot of conviction on where our investment is based on the consumer not the noise outside it only makes us a little bit more optimistic that some of the spend that continues this year to be candid.
Yes.
Thank you.
Yes.
Thank you.
Excuse me. The next question is from Matt Bottomley with Canaccord Genuity. Please go ahead.
Hey, guys. Thanks for all the color. This evening just wanted to go back to you.
You had chatted a little bit about sort of a normalized run rate SG&A, maybe just at a higher level is there is there an easy way to sort of describe our outline the difference between the reduction in adjusted EBITDA versus the increase in cash flow from operations I know there were some transaction costs and other noncash things within the SG&A. So is there an easy way to kind of reconcile that.
Theres really not that I think the statement of cash flows when it's published will give you kind of better color there.
Yes, there is a number of things that kind of obviously run through that operating cash flow number. So it all starts with adjusted operating EBITDA and kind of goes from there.
We feel good about it and again like I kind of mentioned in my prepared remarks.
We're constantly looking at places, where we feel like cash can get parked unnecessarily, particularly on the balance sheet. So as we look ahead one of the things. We're maniacally focused on is just making sure that we manage our working capital levels and.
And at the right size for the revenue that we're that we're effectively using them to generate.
Okay, Great I'll go through the rack more carefully.
And then also just in terms of not looking for anything specific thats forward looking but maybe just sort of some bullets on what the growth catalysts are just given that the environment isn't impacted pretty negatively with inflationary.
Pressures in some of the other things that were mentioned on this call. So I know.
You are calling for maybe a flat Q2 print potentially but you know the second half of Q2 is typically where we get to the some of the more seasonal highs of it.
Mentioned, Florida, Minnesota, Rhode Island, potentially as a rec market clearly new Jersey, turning online. So are there other things that you can just point to that you think will promote growth specifically for GTI in your portfolio and sort of the next couple of quarters without sort of commenting if you'd think that they will or won't happen.
I mean, I think you said in your question, Matt you understand the industry quite well and the seasonality of what's going on and why the second quarter sets up pretty well in the third quarter et cetera. We said the same thing heading into the fourth quarter with where the seasonality is.
I think we've talked about the catalysts, but its adult use it depends which quarter which year.
We think the 40 plus million Americans don't quite have adult use product is a major catalyst I can't tell you, which quarter, Connecticut, New York or Virginia turns on you mentioned, Minnesota, we continue that investment it really just started we disclose it this year. So as you look out for a major catalysts you have a $6 million of about 6 million persons state. It really is not consuming.
That much candidates.
The number of Minnesota is pretty small on an annual basis.
Under 100 versus Colorado, that's 10 or 15 ex that market with two operators.
Can you go through the math of each state for things like that we have product introductions, we have brand introductions and we're at a place with the scale of the business with best in those brands.
Again, we think are impacting the American experience through cannabis Theres a lot of demand for this product. If there wasn't there would not be people lined up around the corner at these stores in New Jersey. So thats what gives us a lot of conviction there ends up being a lot of upside within the 25, plus or minus $1 billion of the U S market zooming out triples, and over time, we will.
Grow there'll be billions of dollars of added to the market that Greenfield has been investing tens of millions of dollars in for the last several quarters.
That's what gives me a lot of comfort is the team a lot of comfort that's what we're working very hard on it.
We feel good about where our boat is it that way that is pushing us out you know behind.
Behind the wave is some German it's tough to be there, but we are excited about the future for the American candidates consumer with all of those catalysts that we've mentioned, including new product drops new strains and various other things.
Okay, great. Thanks, Ben.
Thanks Pat.
The next question is from Sean Shadow Private Investor. Please go ahead.
Yeah, Hi, I'm, having some concerns to about how much stock. So you guys are selling because it's down like 30% in the past 30 days and like almost 70% last year. Every every quarter you guys are making profits and it seems like every single quarter that stocks going down and I could come up with some creative ways to keep it at a standard.
I mean, you guys are making profits.
Yes.
Losing the same amount of money and like it's your people that are doing it.
I appreciate the question our focus continues to be on building, both buoyant business I would say the I mean, youre, giving away money and cash to buy different communities, how about giving away some of those stocks like buy some back from stocks and give those away give some stocks to your employees like some.
I'll keep that like I know, it's the OTC stock and it's just a joke right now and it's up to you basically to talk to your peers and your colleagues is telling me to stop selling <unk>.
Some of that back create a floor and build on it.
Okay. I. Appreciate the question. This is an open market every day and you're welcome to do as you choose we think we're building a business that will be the largest weight over the medium and long term and it is currently being voted off the island in our capital markets. That's very clear that's why we put enough cash on the balance sheet in order to withstand this kind of capital strong I've said on this call.
Many times, we grabbing umbrella when it was sunny is not starting today I think the nature of it you can hear it in the questions and some of the edge that's fine but over here is a business. We continue to run the business for the medium and long term not for the trading in the stock that's not our business look the counsel from longer and buffet over the weekend and how to do this thinking about the COO.
<unk> thinking about the farm, but I appreciate the question.
This concludes our question and answer session I would like to turn the conference back over to Ben <unk> for any closing remarks.
Thanks for all the questions interesting call look forward to giving you guys. The next update after the second quarter.
First you got to get outside of the spring and enjoy it. Thank you all.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.